Notes on the book: Supercapitalism

Supercapitalism: The Transformation of Business, Democracy, and Everyday Life, by Robert Reich, is the most interesting book on the American government and how it relates to our lives that I’ve read in a long time.

In a nutshell, the thesis is: “Capitalism has become more responsive to what we want as individual purchasers of goods [and investors], but democracy has grown less responsive to what we want together as citizens.” “Democracy means more than a process of free and fair elections. Democracy, in my view, is a system for accomplishing what can only be achieved by citizens joining together with other citizens–to determine the rules of the game whose outcomes express the common good.”

He makes what I consider an extremely cogent, well-written, and persuasive argument to support this. He explains why it happened, focusing on the history of the American economic and governmental structure starting in the post-War era (the fifties), and showing how major changes started in the Seventies and continued to the present.

He offers explanations for:

• Why CEO pay has soared into the stratosphere and what prevented it from soaring before
• Why inflation has become less of a threat than it was three or four decades ago
• Why antitrust laws are less important today as a means of restraining economic power than they were previously.
• Why there are so many more corporate lobbyists and lawyers in Washington, D.C.
• Why politicians demand that companies be “patriotic” and put America before other nations
• Why a bigger fuss is being made over corporate philanthropy when corporations were never set up to be charitable institutions
• How someone can fret about the decline in hourly wages and simultaneously hunt for the best deal from China or India, which is often at the expense of an American’s wages or even job.
• How someone can lament the decline of independent retailers on Main Street while at the same time do most of their shopping at big-box retailers and online.
• Why a person who is deeply concerned about global warming might nonetheless buy an SUV
• Why politicians like to publically excoriate CEOs but then enact no laws making what they did illegal
• Why the move toward improved corporate governance makes companies less likely to be socially responsible
• Why the promise of “corporate democracy” is illusory
• Why the corporate income tax should be abolished
• Why companies should not be held criminally liable
• Why shareholders should be protected from having their money used by corporations for political purposes without their consent
• Why large companies have less economic power now than they had three decades ago
• Why the immense increase in corporate lobbying is due to a decrease in the market power of the corporations

You may be thinking about some of these points: “Oh, it’s obvious why.” But Reich’s explanations are often not what you’d expect.

None of this happened because of Ronald Reagan or Margaret Thatcher; the trends were clearly under way before they came to power, and the same trends can be seen in other countries to some extent. Neither were they caused by heroic or villainous CEOs; the changes are structural, not personal.

“The executives of Wal-Mart or any other large company are not brutally insensitive or ruthlessly greedy. They are doing what they’re supposed to do, according to the current rules of the game–giving their customers good deals and thereby maximizing the returns to their investors. Just like players in any game, they are doing whatever is necessary to win. But just as all games require rules to define fair play, the economy relies on government to set the economic ground rules. If government wanted to do something about the means Wal-Mart employs, it could change the current rules. In theory, it could enact laws to make it easier for all employees to unionize, require all large companies to provide their employees with health insurance and pensions, enact zoning regulations to protect Main Street retailers from the predations of big-box retailers, and raise the minimum wage high enough to give all working people a true living wage. All such measures would have the likely effect of causing Wal-Mart and other large corporations across the board to raise their prices and reduce returns to investors.”

Reich is not especially advocating that government should do these things. His point is to show what could happen, and why things are happening the way they are. He would like there to be more public conversation about whether or not to make these kinds of tradeoffs. The last sentence is “The first step, which is often the hardest, is to get our thinking straight.”

The writing style of the book is simple and direct, and fun to read. He has a lot of supporting facts and figures as well as good illustrative stories.

I believe that his overall point is extremely valid, and provides a useful framework for thinking about the vital issues of our economy and our government.

Footnoted: News from the Footnotes about American Corporations

I heard on Marketplace (American Public Media’s radio show) about footnoted.org, where Michelle Leder exposes juicy information about corporations found in the footnotes of their reports. If you’re a shareholder, you might be interested to know how your management is spending your corporation’s money. Here are some fun ones:

• Fred J. Kleisner, Interim President and CEO of Morgans Hotel Group, had to relocate to New York City. The company is paying all his expenses, including a housing allowance of up to $30,000 per month. “Even in Manhattan, that guys you some nice digs.” He also gets a $750K salary with a bonus up to 200% is he meets performance targets.
• For their CEO Michael McGrath, I2 Technology paid nearly $1 million flying him between the company’s offices in Dallas and his home in Maine.
• Countrywide gave CEO David Sambol a $2.7 million promotion bonus shortly before their stock imploded.
• Qwest Communications CEO Edward Mueller’s stepdaughter attends high school in California, but Qwest is based in Denver. But no problem; she’s allowed to use the company’s Falcon 2000 private jet for her commute to school. This could cost Qwest as much as $600K, assuming normal charter rates. In fact, more than half of the CEO’s in a recent study are able to use their corporate jets for personal trips.
• David Peterschmidt is leaving as CEO of Openwave Systems after three years, for which he’ll get a lump-sum payout of $1.5 million and full vesting of his 175,000 shared of restricted stock — also worth about $1.5 million. This was while Openwave’s shares fell by 17%; it has been falling and falling ever since. Meanwhile there has been a shareholder lawsuit, involving Peterschmidt and others, claiming the the stock price dropped because of the company’s options backdating scheme, which encompassed seven years and led the company to restate its financials. In 2007, they lost $197M on revenues of $290M.

It’s good to be CEO.

Microsoft and Open Source

There’s an interesting article in InformationWeek, entitled “Microsoft’s Bill Hilf Reveals Its Open Source Strategy”, interviewing Bill Hilf of Microsoft. He’s described as Microsoft’s “leading light on open source”. It’s mostly about Linux.

http://www.informationweek.com/news/showArticle.jhtml?articleID=203100965

They say he’s involved with Microsoft’s strategy for “dealing with” Linux. That reminds me of John F. Kennedy telling the CIA that they should “deal with” Fidel Castro. And it reminds me of the way Microsoft decided to “deal with” Netscape, when they were competing with its browser — Microsoft’s strategy was to “suck the oxygen out of Netscape”. But that’s just free association on my part! More seriously:

Hilf says “When people buy commercial software, really what they’re buying is a guarantee. You’re buying a guarantee that what you have will perform, and has been tested and there’s someone you can call up, and if things go really bad someone’s liable if something doesn’t work.” Is that so? Look at the end-user license agreement for Windows Server, for example: “LIMITATION ON AND EXCLUSION OF DAMAGES. You can recover from Microsoft and its suppliers only direct damages up to the amount you paid for the software. You cannot recover any other damages, including consequential, lost profits, special, indirect or incidental damages.”

What does a “guarantee” mean? Surely it does not mean “certainty”: plenty of commercial software sometimes performs poorly or has bugs. Does it just mean “there’s someone you can call up?” But that’s true with actively-maintained open source software, too.

Prof. Gerry Sussman of MIT, for whom I have tremendous respect, once tasked me with putting together a plan for a company that would provide open source software that really did come with a legal guarantee. The idea is that the software would be quality-assured really, really well. The goal was to help reassure potential users of open source (or free) software. I wasn’t able to figure out how to make this work, and I’m not sure it would solve the problem it’s intended to solve, but maybe someone else co8uld do better than I could.

The real question is whether the particular open source software in question has higher quality/performance, and whether you get better response time for bugs, than some particular commercial alternative. I don’t think there’s any way to generalize for all open source software. A relatively small number of open source products have a lot of diligent maintainers, and even Q/A people, sometimes paid full-timers; a larger number are written by one person and often abandoned. There’s everything in between. Linux is the most extreme example I know of a very powerful open-source community.

Hilf goes on to say that their big customers have “chosen Linux or Apache or open source in general because of a few simple reasons: either price, or functionality, they want a more modular system or they want something that has a smaller footprint, there are certain needs that they have that are satisfied by that type of software.” Well, those are some pretty good reasons! I’ll add that when I was at BEA, our customers were also interested in the idea that if they needed fast turnaround on a bug, they could attempt to fix it themselves. And when I was at eXcelon, I found that some of the commercial software we bought had woefully inadequate documentation, and I was forced to decompile Java code in order to figure out how the product worked.

There’s another interesting article about Microsoft versus open source: an interview with the authors of a study called “Dynamic Mixed Duopoly: A Model Motivated by Linux vs. Windows”, which has just been accepted for publication in a special issue of “Management Science”.

http://hbswk.hbs.edu/item/4834.html

It’s all based on a simplified formal economic model, assuming that the main benefit of Linux is the shorter development cycle, while Windows’s main advantage is its larger installed base. Under these assumptions, Linux never drives out Windows (they don’t explain why in the interview). But then if you assume governments and large corporations start using Linux because they can audit it for security, and that companies such as IBM support Linux specifically to diminish Microsoft’s dominance, then Windows could get driven out of the market. They add, “This may be one main reason why Microsoft has been providing chunks of Windows’ source code to governments.” The support of IBM et. al. is important because there are tedious portions of the code that would rarely be developed spontaneously by members of the Linux-developer community.

I don’t know how much we can make of a formal model at all, let alone one with such simplified assumptions, as having actual predictive value, but it’s the only thing I’ve seen like this so I thought it was worth looking at.

Their outlook on why developers are motivated to contribute to open source projects in the first place is: “First, some developers see software as scientific knowledge to be shared ‘like the sharing of recipes among cooks.’ In fact, some describe software developers more like artists seeking fun, challenge, and beauty in their work than like calculative, square-minded engineers. Second, some individuals find it fun to go against Microsoft. As the OSS/free software movement gains momentum and developers foresee that victory is within reach, they increase their effort to accomplish this. Third, because most OSS projects have a log file listing all contributors to the code, some developers find it desirable to participate in OSS projects to signal their ability and to enhance their chances of promotion and professional advancement. Finally, user-developers sometimes fix bugs that they find and then release the improved code so that everybody can benefit.” I’d add that some are paid to develop open source software.

Among their list of things Microsoft could do, the juicer ones are: Let governments access the source code. Give binary away free to organizations and individuals who are not willing to spend money on Windows but would be willing to use Linux (this is like what the airline industry calls “revenue management”: charge less to people who can afford less, using various tricky means to identify these people). Make it as hard as possible for Windows applications, and MS Office documents, to work on Linux. “Promote” Linux’s code forking. And finally. “Infuse fear, uncertainty, and doubt into the Linux user community. For this to work, the statements must be perceived as credible. Credibility requires some past FUD announcements to be realized.”

Can you imagine Microsoft infiltrating open source communities with agents provocateurs whose job would be to foment forks? The main deterrent I can see would be bad publicity if they were caught; but Microsoft doing questionable things is hardly news.

Meanwhile, Microsoft continues to maintain that Linux infringes on 235 of their patents, but apparently won’t say which ones! Could they be bluffing? (Citation: http://www.informationweek.com/news/showArticle.jhtml?articleID=199602086) It reminds me of Joe McCarthy’s claim of having a list of 205 communists in the State Department. (It was a bogus claim, but the specific number gave it credibility.) Could Microsoft convince companies that they need to pay Microsort royalties on Linux? Apparently Wal-Mart has paid up. Would Microsoft tie up Red Hat in lawsuits, until they are overwhelmed by legal expenses? Would IBM come to their rescue?