The Second Reinvention Of Capitalism

| November 19, 2019

In 1916, the Ford Motor Company was one of the most profitable corporations in the world.  Its Model T dominated the market for automobiles – more than 500,000 produced that year.  Henry Ford kept dropping the price, from $825 in 1909 down to $345 in 1916, the equivalent of $7,943 today.

The Company had accumulated a capital surplus of $60 million.  Still, Henry Ford kept distributions to stockholders modest, and instead reinvested the money in new plants, raised workers’ salaries, and continued to reduce the price of the car – which fell to $260 in 1925 ($3,714 equivalent today).  These decisions were driven by a business philosophy

Mr. Ford expressed in an interview given to the Detroit News:

“I do not believe that we should make such an awful profit on our cars. A reasonable profit is right, but not too much. So it has been my policy to force the price of the car down as fast as production would permit, and give the benefits to users and laborers . .”

Dodge vs. Ford

Two stockholders of the Company, James and Horace Dodge, filed suit against the Ford Company, seeking to have a court require it to distribute larger dividends to the stockholders. Each of them owned 5% of the Company.  Henry Ford himself owned 59%.  The Dodge brothers (who were looking for capital of their own car company) brought the suit on the proposition that the purpose that the Corporation exists is to make money for its stockholders.  Raises for its workers and improved products for its customers were incidental to the profit motive.  As such, they believed that the Company was legally required to put the stockholders first.

The case is famous for its legal analysis and also for the testimony of Henry Ford, who had a very different idea, expressed in the following exchange during cross-examination by the Dodges’ lawyer Elliott Stevenson:

Counsel: Do you still think those profits were awful profits?

Ford: Well, I guess I do, yes.

Counsel: And for that reason you were not satisfied to continue to make such awful profits?

 Ford: We don’t seem to be able to keep the profits down.

Counsel: Are you trying to keep them down? What is the Ford Motor Company organized for except profits, will you tell me, Mr. Ford?

Ford: Organized to do as much good as we can, everywhere, for everybody concerned. And incidentally to make money.

Counsel: Incidentally to make money?

Ford: Yes, sir.

The Debate

The debate in that courtroom is being fully argued out today.  In 1962, Milton Friedman published Capitalism and Freedom where he argued that the sole purpose of business is to make money for the stockholders, and that this economic engine would raise millions of people out of poverty and would foster political liberty.   This has been the prevailing view, and capitalism has largely delivered what Friedman promised.  There can be no doubt that capitalism is the greatest anti-poverty program ever conceived; and was one of the great tools in the expansion of liberty.

The question today is how to extend those benefits to the betterment of a greater portion of society.  Because for all of its successes, capitalism has one serious drawback: by its nature it collects more and more wealth in fewer and fewer hands.

We are seeing that today, so much so that now the three richest Americans collectively own about as much wealth as the bottom half of the population combined.  In 1995, the Top 1% in America held 24% of the wealth – now it is 33%.  In contrast, in 1995 the entire middle class held 33% of the wealth, and now it is 21%.

The Industrial Revolution

America has seen this before in its history.  The Civil War jump started the industrial revolution, and capitalism produced great national wealth and advancement; but with great wealth and income disparity.  It took about 30 years for the political system to respond, and for a national consensus to emerge that the laws written in the 19th Century had to be updated for an economy that had moved into the 20th Century.

Some saw the way forward as socialism (and Eugene Debs running as the candidate of the Socialist Party in 1912 received almost 1 million votes and 6% of the popular vote).  But in the administrations of Theodore Roosevelt, William Howard Taft, and Woodrow Wilson (1900 – 1918) the nation instead moved to a reinvented “rules based” capitalism that was further realized in the New Deal of Franklin Roosevelt.

The Digital Revolution

That was 100 years ago, and the economy has again moved through a revolution.  Just as the industrial revolution was driven by steam power, the digital revolution is driven by computing power.  Once again capitalism has produced great national wealth and advancement, but again with great wealth and income disparity.

Today, the political debate is whether laws written in the 20th Century have to be updated for an economy that has moved into the 21st Century.

The Accountable Capitalism Act

The debate has reached the political conscious of Americans on the largest stage: the Presidential election of 2020.  Again some see socialism as the answer, but others call for the next generation of law to again reinvent capitalism to again spread its wealth broadly – most prominently the proposed Accountable Capitalism Act, requiring all corporations with revenues over $1 billon to be chartered by the United States Department of Commerce, instead of a particular state.

For such companies, 40% of the membership of its Board of Directors would be elected by its workers rather than just by its stockholders, and all political activity would have to be approved by 75% of the directors and the shareholders.

Also, leading CEOs are today advancing the idea of “stakeholder capitalism” – stakeholders being customers, employees, suppliers, and communities, as well as the shareholders.  In other words, fully embracing the ideas that Henry Ford described in his court testimony of a company “organized to do as much good as we can, everywhere, for everybody concerned. And incidentally to make money.”

In August, 2019, 181 CEOs from many of America’s leading companies (including the Ford Motor Company) signed a Statement on the Purpose of a Corporation, publicly committed to a corporate culture of “delivering value to our customers”, “investing in our employees”, “dealing fairly and ethically with our suppliers”, “generating long-term value for our shareholders.”

The Statement concluded that each of our stakeholders is essential.  We commit to deliver value to all of them, for the future success of our companies, our communities, and our country.”   You can read the full text of the Statement on the Purpose of a Corporation here.

The Founder of Modern Business

Such ideas long pre-date this Statement, pre-date Henry Ford, even pre-date capitalism itself.   In 1925 Bruce Barton wrote The Man Nobody Knows and it became one of the great best-sellers of the century.  The book describes Jesus of Nazareth as “the founder of modern business.”  Starting from Luke 2:49 (“I must be about My Father’s business”) Barton traced the teachings of Jesus that are the keys to business success.

He notes that Jesus taught that “whoever desires to become great among you, let him be your servant” (Matthew 20:26) — and that companies grow great because they excel in the service of their customer.  And that Jesus taught that “whoever desires to save his life will lose it, but whoever loses his life for My sale will find it” (Matthew 16: 25); and that entrepreneurs succeed not when they try to make a fast dollar, but when they lose themselves in the passion of their work.  Bruce Barton had a secular view of the ministry of Jesus, but his points inform the debate ongoing today.

A Case Lost

Henry Ford lost the case brought by the Dodge Brothers. The case reached the Michigan Supreme Court which ruled that “a business corporation is organized and carried on primarily for the profit of the shareholders.  The powers of the directors are to be employed for that end.  The discretion of directors is to be exercised in the choice of the means to attain that end, but does not extend to a change in the end itself.”  The Ford Motor Company was ordered to distribute $19.3 million to its shareholders.

Henry Ford responded by buying out all of the minority shareholders in 1919, owning 100% of the company, and running it consistent with his principles.

Category: Entrepreneurs

About the Author ()

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Email | Website | Thomas Schetelich is a founding principal in the law firm of Ferguson, Schetelich & Ballew in Baltimore, Maryland, and a member of the United States Supreme Court Bar. He heads both the firm’s corporate/ business law practice and its personal legal services department. He is an AV rated attorney awarded for highest standards of professional skill and ethical practice. Mr. Schetelich devotes much of his practice to assisting charitable and religious organizations, and is the President of The Christian Professional Network. He is a frequent speaker on Biblical and legal matters throughout the United States.