Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity (17 page)

That kind of investment in developing and retaining individual employees doesn’t show up on a ledger, but as Publix’s ongoing success against Walmart grocery stores in its region proves, it does provide bottom-line value in the form of engaged, knowledgeable, and, yes, happy workers. Publix is the most profitable grocery-store chain nationwide, with a margin of 5.6 percent, compared to an industry average of 1.3 percent.
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4. Choose a New Operating System

Of course, Publix is at an advantage because it was built from the beginning as an employee-owned company. It is anything but public, and its employee shareholders are benefiting from the largesse of their founder. His company has ended up more prosperous as a result of his willingness to work against the more extractive biases of traditional corporations, but if he were the CEO of a publicly traded company, he’d likely be in court or worse.

As corporate law is currently structured, CEOs and their boards of directors can be held liable if they fail to do everything in their power to maximize quarterly returns for public shareholders. CEOs are not merely incentivized to pursue the short-term bottom line; they are legally obligated. Rather than liberating the corporation from such ultimately counterproductive rules, the digital age has put them on automatic, exacerbating their impact and making them appear more permanently embedded than ever. The more promising potential of the digital environment would be to revise the corporation itself to our liking. That’s the invitation here—not to digitize the corporation with technology but to approach the corporation itself from a digital perspective of redesign. The corporation’s charter can be recoded.

For example, many are toying with the “benefit corporation” as a way of tempering the emphasis on short-term and extractive profit suffered by traditional corporations goosed up on digital systems. A benefit corporation is expected to pursue profits, but that profit motive must be secondary to a stated social or environmental mission. By law, share price must take a backseat to something else, something decidedly beneficial. These corporations must develop metrics to measure social and environmental benefit based on third-party standards and then submit an annual report to government authorities confirming their compliance.
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Baby-food manufacturer Plum Organics is the largest certified B corp on the
Inc
. magazine list of the top 5,000 fastest-growing companies in America, coming in at number 253.
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Launched in 2007, Plum did not register as a benefit corporation until it was about to be acquired by Campbell Soup Company in 2013. Plum had always committed itself to high environmental standards and appropriate treatment of its employees, and feared losing this leeway under the stricter supervision of a conglomerate’s management and shareholders. By becoming a benefit corporation—the first to be acquired by a publicly traded company—Plum gave itself the insulation it needed from its new owner’s shareholders.
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Plum’s stated mission is to produce organic baby food using lightweight packaging, pay its lowest-earning workers at least 50 percent above the living wage, and give away at least one million pouches of food to needy children per year.
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As long as Plum remains a benefit corporation, that mission will be protected from any corporate or stockholder interference. Unlike its parent corporation, Plum is legally required to prioritize its goals of social and environmental good above that of profit.

Other companies have opted to become what are known as “flexible purpose” corporations, which allows them to emphasize pretty much any priority over profits—it doesn’t even have to be explicitly beneficial to society at large.
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Flexible purpose corporations also enjoy looser reporting standards than do benefit corporations.
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Vicarious, a tech startup based in the Bay Area, is the sort of business for which the flex corp structure works well. Vicarious operates in the field of artificial intelligence and
deep learning; its most celebrated project to date is an attempt to crack CAPTCHAs (those annoying tests of whether a user is human) using AI. Vicarious claims to have succeeded, and its first Turing test demonstrations appear to back up its claim.
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How would such a technology be deployed or monetized? Vicarious doesn’t need to worry about that just yet. As a flexible purpose corporation, Vicarious can work with the long-term, big picture, experimental approach required to innovate in a still-emerging field such as AI. Although investors including Mark Zuckerberg and Peter Thiel have invested $56 million in the company, the flexible purpose structure prevents them from exerting the sort of pressure to get to market that venture capitalists typically put on their investments. The company can’t be forced to sell out or to abandon scientific curiosity for commercial viability.

Vicarious has freed itself from the pressures of the market without having retreated to a research university, where funding comes with strings of its own. “[We] are not constrained by publication, grant applications, or product development cycles,” one Vicarious statement reads. “At Vicarious, there is room to develop new approaches that would otherwise not be supported in academia or industry.”
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In effect, it’s hacked the venture capital process. Vicarious’s purpose is not social, per se, and not environmental either; it is the pursuit of knowledge. That purpose would not qualify the company for benefit corporation status. But by registering as a flexible purpose corporation, it can take on limitless investment while still placing exploration and experimentation above any demands for profitability that might arise.

Finally, the “low-profit limited liability company,” or L3C, is a hybrid corporate structure first used in Vermont in 2008, tailor-made for the digital era’s socially conscious entrepreneurs. It’s a you-can-have-your-cake-and-eat-it-too approach to giving a company many of the benefits of a nonprofit charity while still offering its founders a way to raise venture capital and investors a way to cash out. An L3C works similarly to the flexible purpose corporation, in that it is not bound by the same rigorous reporting standards as the benefit corporation.
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It can solicit funds from a
greater range of potential investors, including private foundations, socially conscious for-profit entities, and grants, which each invest on a different tier suited to their goals and legal requirements. However, the L3C is limited to returning only modest profits.
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That makes it a good structure for organizations such as Homeport New Orleans,
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a small volunteer organization that cleans up marinas around Louisiana, or Battle-Bro,
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a grassroots veteran-support network. It’s a simpler, less burdensome structure than a nonprofit, suited for small groups operating with minimal revenue, for which the “win” is less about cashing out than about remaining financially sustainable. To the socially conscious investor,
some
profit is better than no profit. But is extracting profit really the best way to capture a company’s value in a twenty-first-century digital economy?

Perhaps the real problem with the corporate program has less to do with social values than with simple math. Instead of attempting to mitigate the destructive power of a now digitally charged corporation on the world by inserting a socially beneficial purpose, we may better look at the underlying financial premise: The corporation was invented to extract circulating currency from the economy and transfer it into profit. No stated social benefit is likely to compensate for the social destruction caused by the corporate model itself. In other words, even if someone like Elon Musk or Richard Branson creates an earth-shatteringly beneficial new transportation or energy technology, the corporation he creates to make and market it may itself cause more harm than it repairs. Yes, such corporations bail some water out of the sinking ship, but they are, themselves, the cause of the leak.

In fact, none of these new corporate structures addresses the central flaw that precedes each of runaway capitalism’s social, environmental, or economic excesses: the idea that more profit equates to more prosperity. Profit might lead to more shareholder value, but it doesn’t necessarily maximize the wealth that could be generated by the enterprise over the long term and for everyone involved—even its founders.

That’s why the not-for-profit, or NFP, might ultimately be the best model for the future of enterprise on a digital landscape.

Many mistake the term “nonprofit” (as the not-for-profit is also called) to mean “charity” or “volunteer.” This isn’t the case. The distinction lies in what is done with profits after expenses and salaries have been paid. Publicly traded corporations direct financial surpluses back to investors, CEOs, and boards of directors. They have little incentive to churn it back into the business and, as we have seen, a great deal of incentive to maximize surpluses at the expense of employees, the environment, and even the corporation itself.
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NFPs, on the other hand, are legally restricted from distributing surplus revenues to shareholders—stockholding investors, boards of directors, founders, worker-owners, or otherwise. An NFP must direct all surplus revenue back into the company. A not-for-profit’s employees can be paid handsome salaries and may engage in a very broad range of work—broader even than benefit corporations. But an NFP may not have owners and may not be used to benefit anyone or anything other than the stated beneficiaries of its work.
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It can make its employees wealthy and its customers happy, but no matter how successful it becomes, it can’t extract cash out of the system, and it can’t be sold.

The most creative digital companies have begun to mix and match various corporate strategies. The Mozilla Foundation, developers of the Web browser now called Firefox and one of the most successful digital companies of our time, is a not-for-profit. The company is a success both for its widely used open-source technologies and for its leadership position in a field dominated by platform monopolies. Mozilla is actually made up of two different entities: the Mozilla Foundation, a nonprofit, and the Mozilla Corporation, which the foundation oversees. The subsidiary corporation is responsible for much of Mozilla software’s development, marketing, and distribution. It collects the massive revenue generated by Firefox,
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but it has no publicly traded stock, no dividends, and no shareholders. All profits are directed back to the nonprofit,
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which can spend them only to fulfill the Mozilla Foundation’s nonprofit mission: “To promote the development of, public access to and adoption of the open source Mozilla web browsing and Internet application software.”
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By shunting
profits into a nonprofit instead of delivering them to shareholders as capital gains, Mozilla is able to maintain its distributed network of open-source volunteers and five hundred to a thousand paid employees.
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Capital is always in service of the business, its products, its employees, and its customers, never vice versa.

Any of these structural adjustments, and many others currently emerging, give corporations a way to transcend, or at least sidestep, the growth mandate that threatens their sustainability and longevity. Instead of removing money from the economy, they end up distributing their prosperity laterally—as if through a network. The money stays in circulation, providing currency to more people and enterprises. The piles of cash no longer accumulate, and the corporate obesity conundrum improves. Profit over net worth increases, even if only because net worth is shrinking. It’s like getting a better body-fat percentage simply by losing weight.

But if corporations cease to grow or even get slimmer, if money is moving sideways between many people instead of upward from debtors to lenders and investors, then how does the entire economy grow? Isn’t the whole system, from the Federal Reserve on down through the banks and bonds and GNP, all dependent on some rate of growth? Don’t we always need more housing starts, more consumer activity, and increasing corporate earnings just to pay our national debt?

Yes, because that’s the way the operating system was set up in the first place. Corporations may be the dominant players in the economic game, but that’s only because they were built to succeed within the context of a very specific set of rules. If we want to see a genuinely new type of player emerge, we must rewrite the rules of the growth game itself.

Imagine growing up in a world where only the Macintosh operating system existed. If every computer you ever saw ran OS X, you would never know there were any other possible systems. In fact, you wouldn’t even know there was such a thing as an operating system. OS X would just be what a computer looks like. The same is true for money. The type of currency we use is the only one we know, so we assume its problems are part of the nature of money itself.

Something about our economy isn’t working anymore. But it’s hard to call attention to the flaws in our system or suggest improvements without challenging a few seemingly sacred truths about the money we use and what it was invented for. Since the Cold War—which is when we put “In God We Trust” on our money
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—doing anything that called the tenets of capitalism into question was considered traitorous. We were steeped in an ideological war over a whole lot of things, but it seemed to be mostly about the freedom of corporate capitalism versus the tyranny of state Communism. To deconstruct anything about capital—where it came from, how it worked, what it favored—felt very much like deconstructing
the American way. Inquiring into our currency’s origins was to call attention to its very inventedness. And no good could come of that—not when the faith of investors, consumers, and borrowers was so inextricably tied to our prospects for growth.

Corporate grants and tenure appointments went to economists whose research confirmed the merits of capitalism; those whose work fell outside this purview were shunned or blacklisted.
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As a result, the economists who passed through our finest universities ended up seeing the architecture of capitalism as a precondition for any marketplace. That’s why the economic models to emerge over the last half century, however complex and intelligently conceived, almost invariably assume that the given circumstances of our particular market economy are fixed, preexisting conditions. Our economists have been trained in an intellectual universe with just one recognized economic rule set. That might be fine if economics were part of the natural world, whose principles are discovered through science, but it’s not. The economy is less like a forest or a weather system than it is like a technology or a medium. It was created not by God but by people.

Indeed, if the chartered monopoly can be thought of as a piece of software, the central currency system on which it runs might best be understood as an operating system. The one we use—the bank-issued central currency of capitalism—is the only one most of us know. Even “foreign” money is just someone else’s bank-issued central currency. Like the fictional computer users who know nothing but Macs, we think the stuff in our wallets or bank accounts is money, when it’s really just one way of accomplishing some of money’s functions.

Luckily, as members of a digital society, we are adopting more hands-on approaches to many of our most entrenched systems—or at least are expressing a willingness to understand them more programmatically. As we have seen, an individual corporation can be recoded, like a piece of software, to create and distribute more value to its various stakeholders. To do so, it must prioritize value creation and circulation over growth. The company may even stop growing or begin to shrink, which is perfectly
okay as long as it spends down its frozen capital to satisfy its debtors and investors and then arrives at an appropriate scale for its market.

But while such companies may better serve the needs of people and even culture, they are incompatible with the underlying economic operating system. If corporations stop growing, then the economy stops growing, and unless something else comes in and changes the equation, the whole house of cards comes down. This is less a function of corporate greed or investor impatience than of the currency system we use and the fact that we use it to the exclusion of all others. Its universal acceptance has allowed currency to become a largely unrecognized player in the economy, as if it were an original feature of market activity, like supply, demand, labor, or commodities.

Currencies, tokens, and precious metals have indeed been used as means of exchange for thousands of years; but debt-based, interest-bearing, bank-issued central currency is a very particular tool with very particular biases—most significantly, a bias for growth. Capitalism itself is less the driver of this currency than it is the result. Capital is not an ideology so much as an artifact of a kind of money—a way of exploiting a particular operating system that runs on growth.

There used to be many kinds of money, all operating simultaneously. This may seem counterintuitive today, when the very point of money is to be able to count how much you have and compare it to how much everyone else has. But before the invention of central currency, money’s primary purpose was to help people exchange goods with one another more efficiently than simple bartering allowed. Anything that promoted the circulation of goods between people was considered a plus.

In fact, prior to the emergence of the bazaar, most people didn’t have any need for money, anyway. They were peasants and farmed the land of a noble in return for a bit of the crop for themselves. The only money was precious-metal coin, either left over from the Roman Empire or issued by one of the trading centers, such as Florence. A bit more currency was issued to pay for soldiers during the Crusades, and some of this returned home with the survivors, along with the crafts and technologies of foreign lands.
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As we saw, this gave rise to the bazaar, where locals traded crops and crafts with one another and purchased spices and other “imports” from the traveling merchants.
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But there wasn’t enough gold and silver coin in circulation for people to buy what they wanted. Precious metals were considered valuable in their own right. What little existed was hoarded, often by the already wealthy.

People bartered instead, but barter just wasn’t capable of handling complex transactions. What if the shoemaker wants a chicken but the chicken farmer already has shoes? Barter facilitators arose to negotiate more complicated, multistep deals, much in the style of multiteam sports trades. So the shoes go to the oat miller, who gives oats to the wheelwright, who makes a wheel for the chicken farmer, who gives a chicken to the shoemaker. But the relative values of all these items were different, making the brokered barter system incapable of executing these complicated transactions with any efficiency.

That’s when clever merchants invented currencies based on something other than precious metal. Instead, vendors whose sales over the course of a market day were fairly regular could issue paper receipts for the chickens or loaves of bread they knew they would sell by the end of the day: “This receipt is redeemable for one chicken at Mary’s chicken stand.” Market money could be issued by any merchant whose sales were stable enough to engender trust.
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So at the beginning of the market, the chicken farmer could spend her chicken receipts and the shoemaker could spend his shoe receipts on the items they needed, jump-starting the whole marketplace. The receipts would then circulate through the market throughout the day—just like money—until they got into the hands of people who needed chickens or shoes, at which point they would be exchanged with the original merchant for goods. To make matters even easier, the receipts would have a declared value stamped right on them—the market price of the products they represented. At the end of the day, extra receipts would be brought back to the merchants who issued them in return for metal coin, or saved for the next market day. The purpose of the money was not to make the issuer
rich but to promote transactions in the marketplace and make everyone prosperous by getting trade moving.
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Almost anything could be represented as currency. Another very popular, longer-lasting form of money was the grain receipt. A farmer would bring his crop to the grain store and receive a written receipt for the amount of oats or barley he brought in. The receipt might be for a hundred pounds of grain, which had an equivalent numerical value in coin. It would usually be printed on thin metal foil, with perforations on it so that the farmer could tear off a piece and spend a portion at a time.
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Since the grain was already banked and in a facility that wasn’t going anywhere, grain receipts tended to have a bit more long-term value. But they couldn’t be hoarded like precious metals. Instead of gaining value over time, grain receipts lost value. The people running the storage facility had to be paid, and a certain amount of grain was lost to spoilage and vermin. So the issuing grain store reduced the value of the receipts by a specified amount each month or year. A hundred-pound receipt in March might be worth only ninety pounds of grain by December.

Again, this wasn’t so much a problem as a feature of this money. People were incentivized to spend receipts as soon as they received them. Money moved through the economy quickly, encouraging transactions. Ideally, someone who needed grain ended up with the receipt just before its next date of reduction and redeemed it for the oats.

These local moneys worked right alongside the long-distance precious-metals currencies. Gold coins and silver pennies were still required by traveling merchants, who had no real use for stored grain or a future pair of shoes. They also provided easy metrics through which to denominate all those local currencies. The declared value of a loaf of bread on a bread receipt could be some fraction of a gold coin, making it easier for consumers to negotiate transactions, as well as for issuers to reconcile unredeemed receipts with one another at the end of the day.

The lords and monarchs tolerated all this trade for a while but began to resent people putting real monetary values on their self-issued currencies. Besides, the more people traded laterally, that is, with one another,
the less dependent they were on the aristocracy. The peasants were getting wealthy from the bottom up, in an economy whose strength was based on the robustness of its transactions. Growth, a happy side effect of their increased capacity to transact, had to be appropriated. In doing so, it was turned into a financial weapon.

The nobles hired financial advisors—mostly Moors, who had more advanced arithmetic techniques than the financiers of Europe—to come up with monetary innovations through which the wealthy could retain their class advantages over the rising middle class. We already saw how the chartered monopoly would give royals the ability to assign entire industries to particular companies in return for stock in the enterprise.
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But not every industry was that scalable—at least not back then. Kings also needed a way to extract value from all those little transactions between people and, ideally, to slow down all that economic activity so that the middle class did not overtake them.

So one by one, the monarchs of the late Middle Ages and early Renaissance outlawed local currencies and replaced them with what amounted to coin of the realm.
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By law, people were forbidden to use any other currency—a rule officially justified, ironically, by the fact that the non-Christian icons of the Muslims appeared on some of the coins people had been using since the Crusades.
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The real reason, of course, is that with absolute control over coin, monarchs could exert absolute control over their economies. People protested and much blood was shed, but they lost the right to issue their own currencies. Instead, all money would be coined by the king’s treasury. As many economic historians have noted, this allowed the monarch to tax the people simply by debasing the currency and keeping the extra gold. What these same historians seem loath to point out, however, is that monarchs made money simply by issuing coin.
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The monetary system itself gave those who owned capital a way to grow it.

In a practice analogous to the way central banks issue currency to this day, monarchs created coin by
lending
it into existence. If a merchant wanted cash to purchase supplies or inventory, he needed to borrow it from the king’s treasury, then pay it back with interest. It was a bet on future
growth. Unlike market money, which had no fees, or grain receipts, whose fees went toward a working grain store, central currency cost money. If people wanted to use money, they would have to pay for the privilege.

This was a brilliant, if exploitative, innovation: money whose core function was to make wealthy people more wealthy. Since the aristocrats already had wealth, they were the only ones who could participate in the new supply side of money lending. If people and businesses in the real economy wanted to purchase anything, they would have to get some cash from the central treasury. Then they’d have to use that money to make some deals and somehow end up with more money than they started with. Otherwise, there was no way to pay the lender back the principal and the additional interest.

So if a merchant borrowed a thousand coins from the treasury or its local agents, he might have to pay back twelve hundred by the end of the year. Where did the other two hundred come from? Either from someone else who went bankrupt (and was therefore facing debtors’ prison) or, in the best case, from some new borrower. As long as there was more new business, there was more money being borrowed to pay the interest on the money borrowed earlier. This was great for the wealthy, who could sit back and earn money simply by having money.

Participants in the bazaar didn’t fare so well. This new money was still scarce and expensive. Where market money was as plentiful as the demand for goods at the market, central currency was only as abundant as the participants’ credit. Merchants who used to cooperate now competed against one another for coin in order to have enough to pay back their loans. Frequent currency debasements also led people to hoard money out of fear that current coin had more gold in it than whatever was coming next. Moreover, everything in the market now cost more, because money itself was extracting value from people in the form of interest. They weren’t just paying for a chicken, but also for the chicken farmer’s debt overhead. If they were participating in growth businesses, they might have stood a chance of keeping up with the cost of capital. But these were largely subsistence enterprises.