HBS Alumni Bulletin, Class Notes   June 2007   

        Ray Carey, retired CEO of ADT, Inc., suggests that it is our education system that has supported and economic system that is short term and greedy. He took up the need for a more equitable economic system in an eloquent January letter to Derek Bok, challenging him to lead academia to better educate our citizens in what Ray calls "democratic capitalism" that "reduces the tension between capitalism and democracy and maximizes the broad distribution of wealth."

        He suggests that "the intellectual community has persistently favored political fixes for social problems but ignored economic solutions." The universities are “failing to unite and elevate our society” with a new set of values that “harmonize individual ambitions with the instinct for social cooperation,” build trust and cooperation in the workplace. He observes that economic purpose in the European Union has stopped the violence of stupid wars and says, “Never has the responsibility of the university to educate, elevate, and unite been greater.”

        I cannot do justice to his three-page letter here, but you can find out more from and about Ray, and his book, Democratic Capitalism, The Way to a World of Peace and Plenty, by visiting the Carey Center for Democratic Capitalism Website.
 

Conflicts in Capitalism, Two River Times Editorial    June 2007    

          Recently I had the opportunity to examine the conflict in capitalism on Public Access TV on Harold Channer’s “Conversations.” View on YouTube.com, Ray Carey.
This is part of my continuing effort to make the damage from ultra-capitalism visible and solvable. This system that treats the wage earner as a disposable cost commodity, and in which finance capitalism dominates instead of supporting the job growth economy, has concentrated wealth in record amounts at home and prevented America from substituting economic common purpose for violence abroad.

          The conflict has not changed since the time of Adam Smith but it is getting worse. Democratic capitalists have always known that investing in people will motivate them to innovate and produce. In contrast, the ultra-capitalists have always believed that profits are maximized by suppressing wages and benefits. Democratic capitalists also understood Smith’s conditions for the success of economic freedom: They were neutral money, a medium of exchange without influence on the commercial process; and control of the speculators who would deflect capital away from job growth. Never in the history of capitalism have these conditions been so violated as they now are by ultra-capitalists

          One thing is clear in the present robust stock market: The ultra-capitalists will make lots of money. What is less clear is how much damage is being done to the long-term pension savings of wage earners from a quarter-century of cashing in long-term programs for short-term earnings, and the coming switch when the baby boomers start selling instead of buying stock for their retirement.
The stock market is going up because pension savings and foreign investment keep flooding in while the supply of stock shrinks about 6% a year. Incredibly, stock buy-backs and takeovers took $585 billion more stock out of the market in 2006 than new stock issued for growth.

          Mobil, for example, used almost $30 billion for stock buy-backs, a tenfold increase since 2000 when they were using cash to invest in future growth. They paid only $7 billion in dividends. Who made the decision not to combine these to return $37 billion in dividends to the wage earner shareholder? Was the public represented in this decision not to return surplus cash to the economy but to use it to hype short-term earnings and the value of stock options? The reality is that these decisions are made by the CEO, rubber stamped by the Board.
Is it fair to characterize the private-equity craze as buy it, strip it, flip it?

          Every CEO knows how easy it is to cut long-term investments for the benefit of short-term earnings. Even easier is borrowing more money to be paid out in one-shot special dividends. Goldman Sachs and Bain Capital acquired Burger King in 2002; paid themselves a $22.4 million fee for the transaction, then $29 million in management fees, and three months before taking it public again paid $367 million in “special” dividends from money borrowed for that purpose. Their share of the public offering was $1.8 billion--triple their original investment. But they were not finished: They charged another $30 million fee for terminating the arrangement. Is this buy it, strip it, flip it?

          The ways to settle this conflict in capitalism are relatively easy. First, the public must become knowledgeable about how ultra-capitalists who traditionally exploited the wage earners’ labor have now learned how to exploit their capital. This intolerable contradiction will be resolved when hundreds of billions of dollars a year of corporate surplus, now wasted on stock buy-backs and non-strategic acquisitions, is returned to the owners of that capital in tax-free dividends. Then the measurement of corporate performance by institutional investors must be changed from the short-term focus on earnings per share to a three-year running average of sales growth, profits, and cash flow against managements’ predictions. Finally, the government must accept responsibility for preventing asset inflation in stocks and real estate as well as price inflation. The cash-flow protocol would have prevented most of the damage to the people at Enron, and control of asset inflation would have prevented the extraordinary damage done by repetitive recessions and depressions. For details, see my book Democratic Capitalism, The Way To a World of Peace and Plenty, and the website: www.democratic-capitalism.com.Your comments will be appreciated. Email me at careydcntr@aol.com.

 

Keynote address at Gardner High School Graduation, Gardner Mass  June 3rd, 2006      

 Principal Baldassarre, Mayor St. Hilaire,  Superintendent Dr Daring, 

 committee, parents, friends, teachers, and grads to be: 

            It’s a great pleasure for me to be with you today. The last time I stood at this podium I was president of the class of ’44. Now is my opportunity to share lessons learned since with you. This is your night to celebrate, however, I’ll keep it short

             Gardner is described in my book as: “ a perfect place to grow up… good education…good people… a pervasive work ethic… a sense of being part of a whole...a feeling of responsibility to contribute… egalitarian with the emphasis on equal opportunity.” I have wonderful feelings about GHS and its great teachers like Miss Baron in Latin, Miss Cobliegh in Math, and Miss Fairbanks in English who not only taught me and my sister Ann but also my mother and dad, class of 1916.

            You are entering a stage in your life in which as citizens of the world’s most powerful nation you have new responsibilities. Begin with the question: why is the world full of misery, violence, and folly?  The record shows that. 1/3 of the world’s people try to live on $2 a day. 160 million people were killed by governments during the 20^th century.

 My experience as Plant Manager of Electro Dynamic an unprofitable motor company in Bayonne NJ, in the late 1950s began to give me answers to that vital question. Simply by freeing the people to contribute and by building team spirit first learned as a co-captain of the GHS football team, the company became a profitable industry leader. I discovered that in every human association performance improves with trust and cooperation.  My appreciation of the power of economic freedom was later confirmed by countries like China and India who used economic freedom to take ½ billion people out of extreme poverty in the last decade.

Electro Dynamic prospered but in 1963 a fire started in a nearby plastic factory and driven by 50-knot winds across Newark Bay destroyed the jobs and dreams of 800 people and their families. We watched late into a Saturday night when all 14 buildings burned down.  I was then president and the following morning 15 managers met at my home  to discuss how to rebuild ED. Others said that it was mission impossible. We rebuilt in a new facility and kept all but ten employees. This experience taught me that people united in economic common purpose can accomplish extraordinary goals. I came to believe that united people could stop the violence in a wonderful inversion in which. the standard of living goes up and the violence goes down.  This was later demonstrated by the European Union when the Europeans decided after centuries of killing millions of their young men in senseless wars that they would unite in economic common purpose and stop the killing, and they did.

Fast forward to the 1970s when I was  CEO and Chairman of ADT, Inc a large, old company.  Many talented people were there eager to participate and they built profitable momentum that provided an opportunity for a plan in which associates become part owners from payroll deductions matched by the company as performance improves. A contest to name the plan was won by a lady in the Detroit office who suggested that the more people cared the more they would have to share, hence Care and Share.  Ten years later associates owned 13% of the company and some of the lowest paid  took home six figure checks to their surprised spouses.

  I had learned the stark differences from short-term and greedy capitalism that pays the CEO 300 times the average worker while maximizing profits by suppressing wages and benefits in an environment of fear and intimidation, in contrast to democratic capitalism that maximizes profits by motivating and rewarding people for their innovation and productivity in an environment of trust and cooperation.

From experience and study I had two of the answers to that hard question: there is no reason for misery as economic freedom can feed, clothe, shelter, educate and provide good health for all, and there is no reason for violence because economic common purpose can stop the violence. Terrorists will lose their funding and, in time, young people in all cultures will demand the good life.

            Folly continues, however, because big mistakes are made by a few people. We have abandoned the ideal of our Founders who believed that government must reflect the “will and wisdom:” of the people filtered by an “aristocracy of talent and virtue.” Thus the egregious mistakes by the few, like George III and Louis XVI at that time, would be avoided by the wisdom of educated citizens.

            For example, I believe that you as a group could design an economic system based on trust and cooperation that did not concentrate wealth in record amounts, and a foreign policy based on trust and cooperation in which America was a strong team player. You could start at the economic, not the political end; believe in the inevitability of peace, not war; and find new leadership, whether Republican or Democrat is not important as both need a reform agenda. Perhaps new leadership is here in this room, getting ready to graduate. Why not? You have been given a wonderful start by your good fortune of growing up in Gardner

My book, Democratic Capitalism, The Way to a World of Peace and Plenty, is in your libraries but can be read and downloaded from my website www.democratic-capitalism.com. I would welcome your email communication.

At the end of my book I present my vision of a world in which countries compete on improving the lives of their people based on the U N Human Development Index which  “ will shine a bright light on any nation that is not improving lives, and an even brighter light of stardom on every nation that is leading the way. Future generations will benefit from this self-perpetuating momentum towards the realization of full human potential but will wonder why it took so long because it will seem so essentially human, so reasonable!” 

Such a beautiful world is a pragmatic opportunity during your lifetime. Please use your powers of reason to understand the way, and then use your political power to make it happen. Congratulations on your accomplishments, and good luck with your new responsibilities.
 

Democracy and Capitalism--Under Attack!  January 23rd, 2004      

The American Founders initiated the greatest democratic success in human history. The political structure was based on consent of free people led by those of talent and virtue. The economic system was based on equal opportunity and encouraged Americans to improve their lives and leave a better world for their children.

Economic freedom worked well in America and was copied by both democratic and authoritarian governments with similar success. In the last quarter century, however, government deregulated banking at the same time it suspended the disciplines necessary for free markets to work.  Free of regulation, and protected by insurance, subsidies, and bailouts, bankers made hundreds of billions of dollars of bad loans to companies like Enron and international currency speculators like LTCM.  This easy credit also resulted in record concentration of wealth, a slowing of the world’s economic growth, a reversal of economic momentum in emerging economies, and another damaging boom/bust cycle. These “ideologues of the liberalization of capital markets” contradicted the principles of both free markets and representative democracy with their mission to make money on money not build the job growth economy. The result is the worst of all worlds’ financial system that privatizes enormous profits for the few, feasts on the retirement savings of the many, and passes on the losses to the American taxpayer. History demonstrates that every country that has allowed finance capitalism to become dominant enters into an irreversible decline.

Another small group, the “ideologues of the American Empire,” contradicted democratic principles at the same time they were hypocritically proclaiming them. They have covertly toppled democratically elected heads of state in several parts of the world, and at different times they have supported tyrannical leaders including Osama bin Laden, and Saddam Hussein. More recently they used the tragedy of 9-11 to activate an invasion of Iraq that they had been promoting for over five years.  Militaristic and nationalistic, their philosophical heroes are Machiavelli and Thomas Hobbes, two men of little accomplishment in their own time who have been elevated to celebrity status by those who agree that morality is an impediment in the affairs of state, military power should be used, that people are fundamentally evil and in need of control by the state, and that war is an inevitability among nations. These ideologues refer to the dark side of human history for confirmation of their bleak views, ignoring that belief in these pessimisms is self-fulfilling.  History records that during the 20^th century 160 million people were killed by governments unable to break away from similar madness.

It doesn’t have to be that way. The geniuses of the 18^th century Enlightenment applied human reason and found the way to a world of peace and plenty. Adam Smith defined the economic system that could eliminate material scarcity, the American Founders provided the government structure that supports economic freedom best, and Immanuel Kant proposed the substitution of law for violence in the relations among nations, with multilateral force available during the transition. The way to a world of peace and plenty has not changed: with economic freedom the living conditions of everyone goes up and the violence goes down. It is a world, however, that urgently needs American leadership in economic common purpose.

Ray Carey is a Locust resident. He was president, chairman, and CEO of ADT, Inc. for 18 years. His book Democratic Capitalism: The Way to a World of Peace and Plenty is now being published. Communicate with Ray Carey at careydcntr@aol.com

SEPTEMBER 11^th, 2001  September 24, 2001, Two River Times, Red Bank, NJ        

Before the attack on America, I was sure that my grandchildren would enjoy a world where the economic and social logic of economic freedom prevailed. After the attack, I became fearful that the world could spin out of control in a series of reciprocal atrocities. A world of peace and plenty now depends on citizens demanding that the United States government change direction from support of the capitalism that concentrates wealth to one that distributes it broadly, and from unilateral actions to support of the UN backed by multilateral force.

           President George W. Bush pledged that the United States would lead a coalition to defeat the terrorists, announced war on Al Qaeda and its leader Osama bin Laden. And presented a nonnegotiable ultimatum to the Taliban government of Afghanistan.  Governmental officials warned that there would be “body bags,” that is, dead young Americans, and “collateral damage” that is, the killing of civilians in countries harboring terrorists.  Further violence can be expected in American cities from these actions, including more planes as bombs, poisoned air and water, and even nuclear devices. 

The United Nations Security council and General Assembly quickly voted to support actions against international terrorism with “a forum necessary for building a universal coalition and global legitimacy for the long-term response to terrorism.”  Polls indicated that 90% of Americans favored a strong UN presence in the fight against terrorism.  President Bush never mentioned the UN in his Address to Congress. 

Without compromising options, the United States could support the UN in the response to world terrorism, elevate the UN to a new level of power and prestige, increase efforts to spread the benefits of economic freedom, improve communication with the Muslim world, and win the war on terrorism.  Conversely, a US led coalition will give the fanatics the hoped for jihad, or holy war.  The inevitable killing of civilians will be used to widen support for the terrorists among moderate Muslims and risk the toppling of friendly governments by religious fundamentalists.  The war will spread, become more violent, and be un-winnable. 

Profound hatred of America is evidence by the suicidal nature of the attacks but the source of hatred must be understood to win the war.  It begins with the reality that the few have so much and the many have so little which will change when the United States leads the world to the capitalism that distributes its benefits broadly.   The hatred is grounded in memories of centuries of Western imperialism now refreshed by America using military superiority in unilateral actions including U.S. air bases and 5,700 U.S. armed forces in their Holy Land, considered a religious insult.  The hatred is sustained because of failure to stop the violence based on Israel’s need for security and the Palestine’s need for territory.  Many in the most populous Muslim nation, Indonesia, hate the U.S. because the American model of capitalism reversed their economy, drove 50% below the poverty line, and destabilized their political structure.  Muslim governments in other countries, like Malaysia, share the view that their countries have been exploited by American economic imperialism. 

This downward spiral threatens civilization unless American citizens instruct their leaders to support the economic system that eliminates material scarcity, elevate spirits, and unites people world-wide, while cooperating with the UN in a world of law among nations backed by multilateral force, not unilateral actions.  These prerequisites for social progress were important before the attack, but are now a matter of survival. 

Footnote for quote: Kofi A, Annan “Fighting Global Terror” New York Times, September 21, 2001 op-ed page A27.  .Footnote on Poll: Reported on CBS radio September 23, 2001.

 Ray Carey, Nantucket, September 24, 2001, email: careydcntr@aol.com

 Ray Carey was the Chairman and CEO of ADT, Inc. for eighteen years most of that time headquartered on the 91^st floor of the World Trade Center north tower.  Carey is the author of Democratic Capitalism, The Way to a World of Peace and Plenty that will be published in a few months but can be viewed in an earlier edition on the Carey Center for Democratic Capitalism web site: www.democratic-capitalism.com.

Two River Times Editorial Reply     April 27th, 2001           

Re: U.S.-CHINA RELATIONS, 4/20/01 L. Williams article

To the Editors:

Congratulations for printing Lloyd William’s April 20^th well reasoned article on the spy plane incident with China. Two River Times fulfilled the media’s vital function in an open society of informing citizens instead of being a midwife in the propaganda process.

China’s conversion to economic freedom has raised the standard of living of more people and democratized more villages than any country in history. Eventually, economic freedom will lead to political freedom. Management of change from tyranny to freedom in a country of 1.3 billion people is complex and takes time. China is making the conversion slowly and carefully in contrast to Russia who accepted U.S. advice to move quickly and use "shock therapy" which resulted in an economic and social disaster.

American leaders did not understand that WW II was the end of Western imperialism in Asia; that error led to Vietnam with all of its tragic consequences. Now, instead of applauding China’s steady movement to freedom, while being patient with its faults, American leaders still do not understand the forces of history. China will pass the United States as the world’s largest economy during the 21^st century. It will now have the resources to resist the humiliations by Western nations that have regularly occurred during the past two hundred years. Continued imperialism by the United States can add to earlier mistakes and make a war with China over Taiwan a matter of "national honor." Young people can be killed and hurt, again, because of the mistakes of uncomprehending leaders and the failure of the media to inform citizens.

China will become a U.S. enemy only if citizens allow those who need enemies to dominate foreign policy.

Smith, Marx, Mill, and 6% Dividends    Ray Carey, 3-30-2001           

In 1776, the American Declaration of Independence proclaimed the mission of "life, liberty, and the pursuit of happiness." In the same year, Adam Smith described the means to this end: economic freedom through private property; competition; involved, well paid workers; and the technology of the Industrial Revolution. This combination would drive costs and prices lower opening up new markets whose additional volume would add more wage-earners, more purchases, and even lower prices. Smith felt that this self-perpetuating growth depended on surplus being distributed to the wage-earner for purchases, rather than to the wealthy whose purchase of luxuries and portfolio investments had little economic benefit. Smith also specified control of the "prodigals and projectors" to prevent them from deflecting capital to speculation, thereby making money high-cost, scarce, volatile, and impatient, all inversions of the money needed to make Smith’s vision work.

By the mid-nineteenth century, capitalism had demonstrated its ability to improve lives but was functioning at only a fraction of its potential. In 1848, Karl Marx identified the reason: Capitalism had enormous productive capacity to eliminate material scarcity world-wide but capitalism’s distribution of surplus was so concentrated that most people did not have the money to buy what capitalism could produce.

Marx pointed out that in an economic decline, this flaw of capitalism accelerated the downward cycle, as lost jobs and wage cuts further reduced demand. Marx believed that worker ownership was the solution because workers would be motivated to maximize surplus that would then be distributed broadly. Marx felt that this superior economic system would supercede capitalism, only, however, after the existing economic, political, and cultural infrastructure had been torn down.

John Stuart Mill, in the same year, in the same city, London, also proposed worker ownership as the method of balancing capitalism’s demand with supply. Mill, however, had a better understanding of management of change than Marx, and grafted his refinements onto the existing system of private property and competition. By combining management skills with more productive workers in a new work culture, Mill reached the same end but avoided Marx’s structural mistakes that later caused such tragic results.

The problem that engaged Marx and Mill should no longer be with us. The wage-earner, through pension plans, 401-K savings, and stock purchase plans, is now the major source of new American capital. Labor and capital are now one! In addition, the Information Age has enhanced the capacity of capitalism to feed, clothe, shelter, educate, provide good health and hope to the world.

Shockingly, despite these developments, this fatal flaw of capitalism persists. Two billion of the world’s six billion population lives in poverty, one billion in misery. Wealth is concentrated in record percentages in the United States and, although most people are living better, a sense of unfairness is building social tensions. Japan’s economy has been starved for decades by the lack of adequate consumer demand at the same time that large corporations have amassed tens of billions of dollars in cash. Europe does not distribute the surplus to the wage-earner it instead taxes and redistributes 50 to over 60 % of their countries’ production.

Wealth is still concentrated in the United States because Wall Street has dominated government policies designed for the privileged few, not the general welfare. For example, hundreds of billions of dollars have been spent by corporations buying back their own stock, most of it without economic benefit. Stock buy-backs are, however, favored by government tax policies over dividends.

Democratic pressure is overdue to get corporations to pay large dividends and to get the government to eliminate the double taxation penalty on dividends. Tax-free dividends for low and middle-income wage earners would return the surplus to the economy consistent with Adam Smith’s wealth creating dynamic. Large dividends would be a strong inducement for the spread of profit-sharing, stock-purchase plans, and ESOPs that maximize surplus then distribute it broadly raising domestic demand and making free trade a universal benefit. Many would reinvest their dividends into more stock providing low-cost, patient capital for economic growth. Finally, this priority for large dividends would relieve the stock market’s frantic pressure for short-term earnings by again valuing companies highly for large dividends as well as fast growth. This democratization of capitalism is now possible and urgent!

 Ray Carey, author of the articles and books, was Chairman and CEO of ADT, Inc. for seventeen years.