5.1 The Failure of American Government

The failure of American Government to adequately serve the interests of our country is the leading cause both for the explosive growth of legalized theft in America and for America's failure to achieve the level of prosperity that our great country is capable of. There is an emerging consensus that government is directed at serving special interests by enabling their schemes of legalized theft rather than directed at serving the broad interests of the American people. This section supports that consensus and seeks both understandings and recommendations to redirect American government to enhance American prosperity. However this effort needs to be conducted with the full awareness that government is a thoroughly political institution and that the purpose of all political power structures is to promote the prosperity of a group of individuals often at the expense of the prosperity of the larger interest of humanity. Nations exist to promote the interests of their people and political parties, corporations, unions, professional associations etc all exist primarily to promote the interests of their members. These political power structures like the organs of the body can significantly enhance society's prosperity as well as their own through their directed specialized talent. However political power structures need to be continually watched and redirected to prevent them from turning cancerous and becoming parasitic on society.

Government in a social power structure serves some of the same functions as the brain serves in biological power structures. In an ant colony the queen provides rigid central control over the activities of the nest. As discussed previously this emphasis on order promotes today's prosperity at the expense of innovation which is necessary for tomorrow prosperity. As a result all higher animals have adopted a looser social structure to allow the species to improve through biological innovation resulting in differential prosperity and survival of individual members of the group (i.e. survival of the fittest). The evolution of mankind toward complex social interactions created a command and control dilemma in the human social power structure. During our early history, mankind regressed to a centralized authoritarian command structure. This provided the order needed to focus social efforts and allowed the rulers leisure time to innovate for the benefit of all. However increasing human prosperity resulting from accumulating social and technical innovations led to a parasitic ruling class. The ascent of enlightenment which reached its fullest expression to date in the ideals of America offers the opportunity to bring evolution full circle. An enlightened society strives to maximize individual liberty and reward individuals based on their production valued by a free market. Such a society achieves both the altruism needed to provide order while also maximizing the opportunities for social and technical innovation.

In an enlightened society, government defines and enforces the rules that both encourage and when necessary restrain self directed individual human behavior to operate in the best interests of society. Our founding fathers understood the command and control dilemma of humanity and developed a system of government with limited powers and a myriad of checks and balances. American history has been a constant process of testing this system as people and their political power structures sought to circumvent social constraints to profit at others expense. The explosive rise of technology has given rise first to industrial feudalism and then to professional feudalism. These new schemes of legalized theft are analogous to the mutant strains of virus that invade our bodies. A period of time is required for the body to recognize the invaders and to develop antibodies to repel the attack. During this delay the toxins produced by the invaders produce a period of sickness when the body is functioning below par.

American history contains many periods of sickness caused by the mutant schemes of theft of our own political power structures or those of other nations. We are currently in one such period of sickness. We have successfully recovered in the past by invoking the ideals of human liberty expressed through responsible democratic process. This process requires understanding the pathology of the disease and then having the courage to take the actions needed for a successful recovery.

Representative democracy is the diffusion of political power to the people with that power expressed through their elected representatives. This marvelous social innovation seeks to achieve the efficiency of centralized control while preventing tyranny through popular control of the elected representatives. However this system only works when the representatives act in the interests of the people they were elected to represent. Our representatives are human beings motivated first by their own prosperity. Many I honestly believe are also motivated by a sincere desire to promote American prosperity. When personal interests and national interests are in conflict they may sometimes act in the national interest. However they are not saints and we can not expect to base a successful system on the expectation of people routinely behaving against their self interest. The challenge with government as with all political institutions is to devise a set of rules and incentives so that serving personal interests also serves America's interests.

The failure of American government is both a reflection of the divergence of societal and personal interests and the increasing importance of government in American society. Corruption has always been a part of politics and from an historical view today's Congress are angels compared to many of the senators and representatives during the Grant administration. However in those days the role of the federal government was very much smaller and their greater corruption had a relatively insignificant effect on our country. The pervasive role of government in modern American society requires that government operate much more efficiently than it has in the past. While limiting the role of government is part of the answer, anarchy is not the road to an American Renaissance. Our increasingly complex society requires a strong and responsive government. I believe achieving a more responsive government will require both changes to make our elected representatives more responsive and changes that increase the role of the American people in the political process.

The only effective control that the American people have on government policy is through the election process. Therefore we should examine this process both for the causes of our current problems and for changes that will improve our representation.

The unwillingness of the American people to support the political process with their vote and with their money are the primary causes of America's political problems. In all fairness this situation has been fostered by elements in our society who do not want popular control. However as long as we have the right to vote, we have nobody to blame for the current situation but ourselves. The right to vote is the cornerstone of democracy, yet in a many elections fewer than half the eligible voters participate. This public apathy accentuates the power of special interests. We need to change the election process to encourage greater voter participation and provide a clearer verdict of voter sentiment.

Many voters are unhappy with the system and yet do not feel they are adequately informed of their representative's or candidate's stand on important issues. This is not surprising since politicians avoid taking stands on controversial issues. Since we are more sensitive to what we don't like than to what we do, we are more likely to remember when we disagree with a candidate than when we agree with him or her. Therefore taking stands on important issues loses votes unless the stand is relatively non-controversial. Candidates understand this negative bias in the electorate and orient their campaigns toward discrediting their opponents rather than presenting their own views on key issues.

5.1 RECOMMENDATION: REQUIRE ISSUE STATEMENTS - Each candidate for federal, state or local office would be required to submit three positions requiring a yes/no vote. Each candidate would be required to vote on the issues he submitted as well as on those submitted by other candidates. The candidate could include a short paragraph on each issue explaining his position, but could not refer to other candidates or their positions. This material would be provided to each voter with their voter pamphlet. Voters could judge the candidates based on the seriousness of the issues they raised and by their response to all the issues.

A common excuse voters offer for not voting is that they do not support any of the candidates or that their vote is simply a vote against the other candidate(s). The election process should provide voters with the opportunity to express these sentiments as a means to send a clearer message to both elected and defeated candidates.

5.1-2 RECOMMENDATION - NEGATIVE VOTING OPTION - For each office the voter could express both positive and negative votes as follows:

Candidate A . . . . . . . . Support
. . . . . . . . . . . . . . . . Lesser Evil

Candidate B . . . . . . . . Support
. . . . . . . . . . . . . . . . Lesser Evil

None of the Above . . . .

Lesser evil voting would permit voters to make their position known to both candidates without throwing their votes away. The electorate could decide to use these votes in a variety of ways:

a) Split votes could be merely informative with the plurality candidate being elected. OR

b) If "None of The Above" received a plurality, a reelection would be required with different candidates. AND/OR

c) If the plurality candidate received a majority of his votes from "lesser evil", a reelection would be required with the parties allowed to run the same or different candidates.

The dependency of our elected officials on special interest contributions for campaign financing is the major cause of special interest control of American government. If America's low voter participation is embarrassing, our political contribution participation is scandalous. A recent article on campaign costs stated that a successful U.S. Senate campaign required about $8M in an average state and up to $20M in a large state like California. These amounts are both astronomical compared to a senator's salary and minuscule on a per voter basis. For example with about 20M eligible voters in California, four senate campaigns (e.g. two for each major party) every six years is only (4 x $20M)/(6 x 20M) = $0.67 per voter per year. Our unwillingness to support the political process by even this minuscule amount forces our elected officials to prostitute themselves to special interests for the funds to get elected. This incredible shortsightedness costs us each thousands of dollars with the Savings and Loan crisis being only the latest example.

The limited income tax deduction for campaign contributions was an excellent program for broadening the popular funding base of political campaigns. I have to be suspicious that the repeal of this law was influenced by special interest desire to tighten their control of government.

5.3 RECOMMENDATION: RESTORE A LIMITED CAMPAIGN CONTRIBUTION DEDUCTION - Restore and enhance the limited income tax deduction for political contributions by allowing a 75% direct tax credit for contributions up to $100 per couple ($50 for single returns) with double this amount in election years. At the same time prevent fraudulent use of this deduction by requiring political groups to report contributions and by checking this item on a significant fraction of the returns filed. Impose a penalty of 10 times any amounts fraudulently claimed.

The issue of term limits for elected officials requires a tradeoff of the real benefits of continuity of leadership vs the penalties of political corruption and lack of social innovation. Continuity of leadership and the positive feedback of reelection are compelling reasons to allow elected officials to be permitted to stand for reelection and to serve a reasonable time in the same office. However the old saying that "power corrupts and absolute power corrupts absolutely" expresses a nearly universal weakness in our human nature. Only rarely do we find individuals who are able to resist the temptation to use power to improve their position at others expense. Since both the temptation to abuse power and the ability to do so increase with time in office, the time proven solution ( from the consuls of Rome to the President of the United States) is to limit the term of elected officials.

The most compelling reason for term limits is not the visible corruption of political dynasties but their intellectual stagnation which thwarts social innovation. While the human mind has an amazing capacity to grow and adapt, we are all fundamentally products of our early experiences. Political leadership whether by kings or by elected representatives inevitably follows the biological model of innovation. The new leader brings new innovative ideas that promote prosperity by allowing the society to work more efficiently. While enlightened leaders continue to provide a few new ideas, periodic changes in leadership are the only proven way to ensure truly effective social innovation.

Term limits can achieve the opportunities for fresh socially innovative leadership without loosing the accumulated experience of former political leaders. There are many positions in government, industry and in universities that can enable former political leaders and their advisors to continue to use their talents and experience. While society needs to monitor this process to prevent "revolving door" abuses, this intellectual cross fertilization can have a very beneficial effect on American prosperity.

5.4 RECOMMENDATION: ESTABLISH TERM LIMITS FOR ELECTED OFFICIALS - All elected offices should have term limits. These limits should be selected to balance the advantages of continuity of leadership with the disadvantages of corruption and lack of social innovation. When conditions warrant, the electorate can modify term limits to better balance these conflicting objectives.

We need more democracy in our republic. Our political system is grid-locked on many important social issues. I believe that more direct voter participation is the only way to permit meaningful social innovation to relieve the current paralysis. While the recommendations previously presented in this section should improve the accountability of our elected officials, even their implementation is highly unlikely without at least the threat of direct voter intervention. Meaningful reform on such issues as gun control, criminal justice system, welfare, education, drugs, abortion, taxation, environmental issues, government entitlement programs, government spending, professional feudalism, intellectual property and many other pressing issues is simply not possible solely through the representative process. On all these issues our elected officials face entrenched minorities who have the power to wreck the careers of anyone who opposes them. Only through popular votes (or the threat of such votes) can governmental policy (i.e. the rules of our society) be made to reflect the will of the American people.

A recent national survey on abortion makes the need for increased democracy in America perfectly clear. The survey reported that 71% supported the current Roe v Wade limits on abortion and 88% would favor allowing abortions in cases of rape or incest. However feelings on the abortion issue are so strong that 42% of the voters would oppose a candidate who opposed their stand on abortion - even if the candidate agreed with them on all other issues. Not surprisingly the abortion issue paralyzed Congress and led to the absurd situation in 1973 of 9 learned men on the Supreme Court attempting to address this issue. The Supreme Court is a marvelous institution for addressing complex constitutional issues. However abortion is a moral issue that doesn't require a Ph.D. in law. The profound issue of what limits our society should place on abortion should be decided by a popular vote of the American people. My personal preference would be for a national law that set upper and lower limits on abortion by popular vote. For example the American people might decide to prohibit third trimester abortions except to save the life of the mother as an upper limit and to prohibit restrictions on the sale of birth control devices as a lower limit. The individual states would then be empowered to set their own limits (within the national range) by popular vote to account for regional differences of opinion on this very important moral issue.

5.5 RECOMMENDATION: EXPAND DEMOCRATIC EXPRESSION - There should be the opportunity for an expansion of popular vote decisions in American society. The following are some recommended guidelines for this process.

1) Where - At all levels of government from city/county to national.

2) Qualification For Ballot Initiative -

a) 30% of legislative body (i.e city council or U.S. Senate)

b) voter petition with 5% of registered voters

c) Voter application with supporting polls - The traditional petition process is both too cumbersome and time consuming and not indicative of widespread voter support. There are many competent polling companies who could be licensed to conduct polls to qualify issues for public vote. A citizens group wishing to qualify an initiative would fund a licensed polling company to conduct a poll on their issue. Such a poll showing evidence that at least half the voters "favored an issue" would be sufficient to qualify that issue for popular vote.

This recommendation to use polls to place issues before the voters drew a negative response from several of my reviewers. They cited the volatility of public opinion and noted that slanted wording could significantly bias the results of the poll. I concur that a public agency should review the wording of proposed initiatives for distorted language before polling the people's opinion. However I remain a strong supporter of polls as a timely and inexpensive means to obtain popular referendums on positions that have demonstrated popular support.

3) Timing - much more frequently to allow a more timely response to the will of the people. As a suggestion, hold elections within the times stated below following the receipt of a qualifying poll on an issue.

                        Federal               State                  Local

Poll with over         6 months            90 days               60 days
50% favoring

Poll with over         3 Months            60 days               30 days
2/3 favoring
4) Winning Requirement - No decision if less than 50% of eligible voters vote. Winning requires 60% of those voting in State and Local elections. In Federal elections 60% nationally and a majority in 2/3 of the states. This requirement for a supermajority on popular referendums is based on the conviction that our representative government should still define most of the rules of society. Popular votes should be reserved for issues where a clear preponderance of the people favor a position, but they have been unable to obtain government action through the representative process.

5) Method - allow voting by mail, by phone with suitable verification (e.g. PIN numbers) to control fraud and possibly using ATM machines at commercial banks.

6) Issue Limitation - No more than three issues at each election with priority determined by highest poll value. Any bumped issues would be decided at another election in 30 days.

7) Proportional Voting - Proportional voting would be required whenever the issue could be so formulated. For example instead of "shall the state be authorized to purchase $300M of school bonds", the ballot would read:

School Bond Authorization For:		Results
			$0		20%
			$100M 		20%
			$200M		35%
			$300M 		25%

In the example shown only 25% of the voters approved $300M, 60% (i.e. 35% + 20% in the above example) approved at least $200M and 80% (more than a 2/3 majority) approved at least $100M. Therefore a school bond authorization of $100M would be approved; the voters have been given a real choice in directing government expenditures and the school board has been given a message on the level of expenditures that the public wants to support.

The direct intervention of government in economic activity creates a basic conflict of interest. The fundamental purpose of government is to define the rules that direct social behavior. We have a legislative branch to define the rules, an executive branch to administer the rules and a judicial branch to adjudicate disputes. This "arms length" objectivity is shattered when government also plays the game using the rules they have created. The table below and the text that follow contrast three areas of government that involve both direct government activity and supervised government activity.

 Direct Government Activity    Supervised Government Activity

  -   U. S. Military		  -  U. S. Military Contracts 

  -   NASA			  -  NASA Contracts

  -  Public Transit		  -  FAA
The U.S. armed forces are the largest single direct government activity. While some of the criticism directed at our armed forces for bureaucracy is justified, for their size I believe the U.S. military is by far the most efficient and cost effect operation of American government. Much of the credit for this efficiency is due to the enlightened actions of U.S. military leaders to privatize as much of the operation as possible. For example, the U.S. Air Force operates its planes and missiles, but they do not design and built them. This delegation of function to the private sector allows both for free market competition ( sometimes compromised by political pressure) to obtain the best equipment and more importantly for the flexibility to allow private sector resources supporting military operations to rise and fall. Military bases are a classic example of the inflexible bureaucracy created by direct government activity. Even when the military wants to close a base, Congress (who writes the rules) intervenes in the execution of those rules.

NASA is I believe an unfortunate example of the overextension of direct government activity. The Apollo Program led to the allocation of extensive private resources to the space program and the creation of many NASA facilities both to supervise these activities and in many cases to perform the activities. After the moon landings, America decided to reduce space expenditures and private sector resources were redirected. However the civil service structures could not be as easily redirected. To my knowledge no NASA center was ever closed and in fact this bureaucracy has continued to grow. The fault is not with the people. From personal experience I can attest that the vast majority of these men and women are bright, hard working and dedicated Americans. The problem is with the system of direct government activity that inflexibly allocates both human and material resources.

The FAA is a good example of a successful government supervised activity. The private sector designs, builds and operates the nation's airplanes. However the FAA plays a vital supervisory role in both licensing the planes and their pilots and in operating the airways. While our air transportation system is also far from perfect, its successful operation contrasts sharply with the mess experienced by many of our public transit systems. Public transit systems exist because some elements of society want to provide a service that the people who use the system are either unwilling or they would say "unable" to pay for. Such a service could best be provided by a competitive contract to the private sector together with whatever level of subsidy is socially desired. However this arrangement makes visible the transfer of wealth from those who don't use the service to those who do. Direct government operation both hides the magnitude of fare subsidy theft from the electorate and creates a bloated bureaucracy to operate the system.

Ownership and the rewards that go with it are inseparably linked with the motivation to incur risk. When the decision makers in any organization are unable to benefit from the rewards for successfully incurred risks, the system becomes non-innovative and bureaucratic. I am indebted to a retired Air Force Colonel who took me aside and explained the "Birds and Bees of Bureaucracy". The way it works he said was, " One I got you is worth ten 'at a boys". If you take some risk and do a good job, the systems says 'at a boy. If you do this four of five more times, you get more pats on the back. However if you screw up even once, you're dead meat. Therefore the way to survive in a bureaucracy is to do nothing (or more realistically as little as possible), because if you do nothing you can do nothing wrong. Fortunately this man and many others I have known were willing to ignore this advice and take risks for American prosperity. However the larger the company and the further removed the decision makers are from ownership, the less incentive there is for risk taking. Government is of course the extreme example of the separation of risk and reward. When your salary is determined by "time in grade" and risks only mean the opportunity for termination, bureaucracy is the predictable result. The many fine men and women in government service are not "bureaucrats". The are simply intelligent human beings who work for their own prosperity playing by the rules that society has laid down for them.

5.6 RECOMMENDATION: Privatize Government Services - The solution to government bureaucracy is to privatize government services to the greatest extent possible. The example of the U.S. Armed Forces provide a excellent example of the successful implementation of this approach. Civil servants would provide an administrative core that would direct government efforts by defining, awarding and administering contracts to private sector companies. Like military service, civil service should be based on a 20 year service life with a partial pension allowing the retiree to have a second career in the private sector. Only the key managers would continue to work beyond their 20 years. This would keep the civil service flexible and minimize the growth of government bureaucracies. The partial civil service pensions after 20 years service should not be considered a "retirement", but only a partial compensation for a forced career change.

The Conclusion of Section 5.1 The Failure of American Government

5.2 The Social Diseconomies of Scale, Part I - Industrial Feudalism

The objective of all living power structures is to enhance the prosperity of their members through cooperative association. Biological power structures are cooperative associations of cells. Social power structures are cooperative associations of plants or animals primarily competing against other species. Political power structures are subunits within social power structures. Political power structures seek prosperity through specialization which benefits them and the larger society they are a part of. However political power structures also seek prosperity through controls which enable them to steal (i.e. transfer of resources at less than free market value) from the other members of society. Unfortunately these two prosperity mechanism exist concurrently. Fortunately the socially beneficial economies of scale diminish with size while the social diseconomies of scale usually increase with size. Therefore the overall prosperity of society is best served by closely monitoring the activities of all political power structures within society and by controlling their size to achieve the best balance between their positive economies of scale and their predatory diseconomies of scale. The failure of the American people to control the size of the political power structures in our country has permitted many of these institutions to become parasitic. The fault is not with these institutions or the people in them, but with the failure of society to properly control their size and direction.

Size and the power imbalance that goes with it is the basic enabling mechanism for all forms of Feudalism. Slavery was sustained by the power of the State primarily through naked force of arms. However as civilization advanced mankind learned to use the mantel of law as a cover for feudal theft. The territorial feudalism of the Middle Ages was legitimatized by an array of civil and religious laws, but was ultimately sustained through superior force. With the advent of democracy (diffusion of political power to the people), the magnitude of feudal theft has become limited by a combination of the size imbalances of the political power structures in society and by the apathy of the people to their victimization by legalized theft. Over the last two centuries mankind has battled the rise of industrial feudalism (use of the control of the means of industrial production to distort the free market for labor, capital and industrial products ) primarily through laws that attempt to compensate for size imbalances rather than by taking direct action to correct size imbalances. However the record of history shows that the vast array of laws and regulations directed at preventing the abuse of industrial power for legalized theft have not been nearly as effective as the periodic restructuring of industrial empires to reduce their size and power advantage and thereby restore competition.

The concept of free competition requires that the participants be of roughly equal size and ability. In wrestling matches the participants are grouped by weight and in team sports the teams are often grouped by ability. Where competition between unequal contestants is required, society can make some compensations. For example we handicap horses by adding weight and we handicap golfers by subtracting some strokes. However social systems have difficulty maintaining free competition when large discrepancies in size or ability exist. I remember one of my grade school math textbooks had a picture of two cavemen negotiating the price of arrow heads. One caveman with a deer on his shoulder had three fingers raised while the other caveman sitting on the ground making arrow heads had two fingers raised. We assumed this was a free market negotiation only because the cavemen were of equal size and neither had a weapon present.

The basis of capitalism is the formation of political power structures consisting of the owners of material resources who apply those resources to enhance their own prosperity. Their prosperity depends on their ability to obtain as high a price as possible for the goods or services they provide and to pay as little as possible for inputs required. When conducted within the framework of a free market, capitalism is an efficient allocator of resources and a marvelous engine for human prosperity. The problems that arise in capitalist systems are not the fault of the system, but with size and therefore power imbalances among the participants. Big organizations subvert the free market in two important ways. Big organizations create power imbalances between the participants in the production process that invite control for the purpose of theft. Big organizations also reduce the number of players and thereby reduce free competition in the market place.

The competition between employers (and their delegated managers) and non-management employees is one of the most fundamental conflicts in civilized society. Typically the employer provides most of the investment needed to manufacture a product or provide a service that he hopes society will find more valuable than the resources required to create it. This investment can include land, buildings and equipment. The employer typically also provides leadership and assumes the risk for the venture. The employees provide the motivation and ability to use the resources provided by the employer to accomplish the desired task. The primary source of conflict is the allocation of payment received for the service among the participants. Unfortunately there are no good solutions for size imbalances in labor market competition. As long as large companies exist, there will be the need for large unions (with all their problems) to protect employee interests.

The competition among suppliers for the public's business is the basis of a free market economy. Although individual consumers are much smaller in size than the corporations which act as production units, a free market is maintained by: a) the consumer's repeated ability to choose between several suppliers and b) the free flow of capital which permits other suppliers to join markets with above average return and thereby increase competition. As the size of a company increases, free market competition decreases both because the consumer is offered fewer choices and because the higher market entry costs discourage new producers.

Reduced innovation is a nearly universal consequence of large company control of a market. While large companies may remain efficient at producing today's products, like the biological model, they often react very negatively to new ideas that may involve risk or require capital investment. The failure of American consumer electronics companies to replace their vacuum tubes with transistors due to their investment in vacuum tube technology was a major factor in their demise and the dominance of Japan in consumer electronics. The lesson America's large companies learned from this experience was not the need to innovate, but the need to control the ownership of new ideas to prevent others from disrupting the market through innovation. The control of electric automobile technology by the automotive industry and the control of solar energy technology by the fossil fuel industry are two examples of new technologies whose development is being thwarted by existing companies at the expense of America's prosperity. This issue of intellectual property control was previously discussed in chapter 4.4.

Many large companies exist not to serve their stock holders and certainly not to serve the public, but simply to promote the power and prosperity of their rulers. When viewed in the pragmatic context of human history presented in this book, this statement is neither surprising nor particularly appalling. The separation of ownership from the control of operation means that salary (direct compensation) and power (indirect compensation) are the only rewards available to corporate management. While many companies base executive salary partially on profit, the primary basis for salary and the perks of power is the size of the company not its profitability. Not surprisingly this incentive system has resulted in many vast corporate conglomerates. These corporations often employ some of America's brightest business and technical talent. However in many cases these corporations are neither leaders in stockholder return on investment nor are they leaders in producing innovative new products in their respective fields. Therefore these companies are inefficient users of both human and capital resources and as such neither serve their stockholders nor American society.

White collar bureaucracy both in private industry and in government is likely the largest instance of right wing theft in American society. Like upper management, middle management is rewarded based on the size of the corporate empire usually measured by the number of employees. Therefore empire building is the proven technique for growing the ranks of management. Blue collar featherbedding is blatant, but at least it is honest. Putting a fireman aboard a diesel locomotive is an inefficient, but not totally wasted use of one person's talent (The fireman gives the engineer an extra pair of eyes.). Such featherbedding increases the number of workers, but not the number of locomotives. By comparison white collar bureaucracy is carefully disguised by "make work activities" that leave the extra workers and managers busy doing work of little economic value. Unfortunately this "make work" often requires additional resources like computers, support staff, travel etc that further adds to the cost of bureaucracy. Company size and lack of management ownership both strongly favor bureaucracy. Increasing size complicates upper management's task and lack of ownership diminishes upper management's incentive for controlling bureaucracy.

Division is the natural response of biological and social power structures to excess size. Amoeba grow and divide. Animals and plants reproduce. Bee hives swarm. Since these power structures are based on altruism, division occurs when such division is in the best interests of the system. However because human political power structures exist for the prosperity of their rulers, they continue to grow far beyond the optimum size for social prosperity. From the political empires of old to the economic empires of today, society needs to take the initiative to divide political power structures when their size no longer serves the best interests of society. When this policy is applied to corporations, a key objective should be to enhance the shareholder's equity by restructuring the corporation for more efficient and more profitable operation.

5.7 RECOMMENDATION: CONTROL CORPORATE SIZE - The anti-trust laws should be expanded to allow for the evaluation of large corporations and the ordered breakup of those deemed to be too large and socially inefficient. The criteria for this evaluation should be as follows:

1) Size - The absolute size of a company is one of the best indicators of the tendency for bureaucracy, lack of innovation and inefficiency. Therefore company size is the most compelling justification of dividing the company into smaller corporate units.

2) Dominance in key markets - This classic anti-trust criteria which has been gutted in recent years should be reinvigorated and used to divide dominant companies to ensure competition in the market.

3) Profitability - Profitability (over a period of years) is the best measure of return on society's financial and human resources. Large companies that retain vigor by achieving profitability (through efficient operation not by control of the market) in excess of their industry's average should be encouraged to continue without restructuring.

4) New Products - Companies that are more innovative than average should also be assessed favorably.

5) Capital Requirements - Some industries have larger capital requirements which socially justifies a larger corporate structure.

6) Other Factors - Factors such as convictions for law violations (e.g. fixing contracts, pollution violations, regulatory violations etc) should also be considered as a basis for restructuring.

The demise of capitalism in American is a major cause of many of the socially diseconomic practices of large corporations. True capitalism is the ownership of the means of production not its delegated control. Henry Ford was a capitalist because he owned the Ford Motor Company. Today's CEOs are not capitalists, they are simply highly paid overseers. For readers who may have watched the TV program "Alien Nation", I mean nothing sinister by the word "Overseer". These are honest hard working men and women who direct their efforts toward promoting their own prosperity. We labor under a myth that people work for companies. They never have and they never will. People work for themselves. Is there a single VP of a Fortune 500 company that wouldn't jump ship tomorrow if offered the position of CEO of his company's competitor? There is nothing illegal implied here. We need not imply that our VP would steal any secrets from his former employer. He would simply apply his talents in a free market to obtain the best return.

Companies run by non-owning managers suffer from the same problems as representative government discussed in a previous chapter. The managers only pursue the interests of the shareholders when the rules of the system create a common interest. However shareholders do not elect corporate officers and therefore have no direct control over the actions of the managers of their company. Shareholders only elect members to the board of directors. However members of the board of directors are often nominated by management which is a blatant conflict of interest. Every year my alma mater sends me a ballot giving me the opportunity to vote for members of the university board of directors. Each director presents a position statement and there is usually a choice to vote for 5 out of 10 candidates. By contrast corporate elections are typically one party slates with only the option to withhold one's vote.

5.8 RECOMMENDATION: INSTITUTE CONTESTED ELECTIONS FOR CORPORATE BOARD OF DIRECTORS - For all publicly held corporations in the United States, 50% of the board shall stand for reelection each year. The slate shall include at least 3 candidates for every two open positions. Each candidate shall present a statement of his or her qualifications and views to the stockholders. Contested elections are a time proven technique for flushing out dirty laundry and promoting innovation.

We have term limits for President (and hopefully we will eventually have term limits for other elected offices). However corporate management is more like a feudal fief where people hold office as long as they can control the power. While nepotism is rare, corporate officers often play the dominant role in picking their successors. The issue of term limits for corporate officers involves the same tradeoffs discussed previously for government office, namely continuity of leadership vs corruption and lack of innovation. I believe the conclusion reached for government office holds just as well for corporate officers.

5.2-3 RECOMMENDATION - TERM LIMITS FOR CORPORATE OFFICES - For all publicly held corporations in the United States, the maximum term of the chief executive officer would be limited to eight years.

There is no better proof of the unresponsiveness of many companies to the interests of their stockholders than the outrageous compensation packages of many American corporate executives. However the current public moralizing against these men and women over their pay is as pathetic as was President Kennedy's jawboning of the steel industry to reduce their prices. In a free country and a free market there is nothing wrong with asking for as much as you can, because in a free market you will only receive what you are worth. The fact that we don't see many of these highly paid executives being stolen by their competitors is a clue that they are being paid more than they are worth. A CEO has every right to ask for a $4M salary, but it shouldn't be his hand picked board of directions sole decision to grant it.

5.10 RECOMMENDATION: STOCKHOLDERS MUST APPROVE CEO SALARY - For all publicly held corporations in the United States, the concurrence of a majority of the stockholders shall be required for all increases in the total compensation of the highest paid corporate officer. This compensation increase shall first be approved by the Board of Directors. All directors who approved the increase shall be noted with an asterisk on the proxy. For example a corporate proxy ballot might read:

1) Directors: Brown, Green*, Jones*, Smith* and White

2) President's Total Compensation: Increase form $1.8M to $2.5M (Directors with (*) voted for this increase)

Reducing the number of large corporations in America (where such restructuring promotes long term stockholder equity) and making corporate management more responsive to stock holder interests will increase corporate competition in America. However these actions do not address two other needs: 1) the need to promote greater profit sharing in American industry and 2) the need to enhance the other end of the industrial spectrum comprising small businesses and self employed individuals.

While profit sharing agreements exist in many American companies, the preference of the owners of capital is to maximize the leverage of their capital to maximize their own prosperity. However this policy both demotivates workers and fuels the growing class division in America between those who benefit a lot from investment and those who benefit very little. This resentment fuels social policies like double taxation of dividends which inhibit American investment. America needs both greater incentives for investment and greater sharing of the risks and rewards of ownership.

5.11 RECOMMENDATION: INSTITUTE TAX FAVORED PROFIT SHARING - Companies would be encouraged to institute profit sharing plans by being allowed to deduct a dollar from their taxable investment profits for each incremental dollar of profit sharing paid to employees. For example if an employee had a base salary of $30K and due to the company's profit sharing plan in a good year the employee received $31K, then both the $1K in profit paid to the employee and an additional $1K of profit paid to the stockholders (either as dividends or retained earnings) would be exempt from federal taxes.

Small privately owned businesses which are the basis of capitalism should be encouraged to promote American prosperity. While government and medium sized corporations with non-owning management are necessary to support the large integrated products of modern society, expanded opportunities for small businesses and professional self-employment will enhance both the motivation and ability of American workers to create today's prosperity and just as important enhance the innovative ability of American worker's to promote tomorrow's prosperity. Every study shows that small businesses are the most productive and account for a disproportionate share of the new jobs created. Like home ownership, business ownership gives individuals a greater sense of common interest in society.

The "make or buy" decision is one of the key decisions every company continually faces with both products and services. This decision should be based only on economics. Unfortunately the bureaucracy factor favors the "make" decision leading to overgrown and inefficient corporate structures. Like my previous recommendation to privatize the government, we also need to privatize business.

5.12 RECOMMENDATION: SUBCONTRACT TAX INCENTIVE - All businesses would be permitted to deduct for federal tax purposes 110% of the expenses paid to other companies for goods and services related to their line of business. For example a car company could not claim the extra 10% for electric power or copy machine purchases. However the company could claim the additional 10% for a wide variety of support services (e.g. accounting, legal, medical, maintenance, management services, engineering design, research etc) as well as for components that they could have reasonably manufactured in-house.

This tax benefit to businesses to stay smaller would more than pay for itself through increased efficiency in the American economy. Companies would retain their essential core, but would be motivated to shed non-core services to companies that specialize in that area. The expanded opportunities for small business and professional self-employment would increase the base of ownership in America leading to enhancement in both motivation and innovation in our society.

Conclusion of Section 5.2 The Social Diseconomies of Scale, Part I - Industrial Feudalism