Of Myths and Men

If things are that bad for investors, why would they put money into stocks when they can get 9% or so without risk in a Canada Savings Bond?

The answer to that one is that investors are not putting their money into stocks. 95% of new external corporate cash requirements are currently being raised by debt financing rather than equity financing.

The Armstrong analysis is faulty in that it compares wages with returns to investors, when it should be comparing wages and profits.

Our answer is that profits are not a share of the pie in the same sense that wages are. Wages are received in the worker's hand and can be spent immediately. Profit does not mean much to investors until they get a piece of it in the form of a dividend. True, a large new undistributed profit could theoretically increase the value of the shares, but this is by no means an automatic result. As a result of any number of circumstances, the shareholder may never receive any benefit, either in the form of a dividend or in the form of appreciation of the value of his shares.

Since corporations rip off the public for 40% profit on each sales dollar, how is it that the investor gets such a low rate of return?

The fact is that the average after-tax profit for industrial firms as a percentage of sales is less than 5%. From 1962 to 1976, the average was 4.3 %. Opinion surveys show that people believe the rate to be much higher, as high as 40% or more.

If the benefit of corporate activity is not passing to investors, it must be going to fatten up executive and management salaries.

A comprehensive survey by Hay Associates, analyzing the real after-tax change in position for executives from the rank of foreman to chief executive, shows that while lower levels of managers have had some real increase in income, senior executives suffered a decline in real income of 15% in the short space of ten years--from 1965 to 1975.

So the equity market is not doing so well; it doesn't concern me.

Wrong! For one thing, workers through their pension plans and life insurance investments are now major holders of equities, and as such have a vital stake in the health of the capital markets. Also, workers can be very much affected if investment dries up to the point where new jobs are not being created.

In spite of the foregoing reactions, we still say that the Armstrong Analysis proves beyond all shadow of a doubt that the corporate rip-off is a myth. The chief beneficiaries of corporate activity have been labour, through real gains in income, and government through its tax share.

This myth about how the corporate pie is shared is often associated with a personified image of a corporation--especially the big corporation--as a "bad guy", a rip-off artist who deserves hatred and contempt. Through the process of personification, the corporation acquires human attributes that arouse emotional responses. I do not doubt that there are men who hate big corporations more passionately than they love their wives.

A way must be found to convince people that a corporation is only a legal entity--that it does not live or breathe--that it can't eat roast beef at Ed's Warehouse; that the reality behind a corporation is nothing more than people--workers, managers, shareholders, suppliers and customers, and that corporate activity should be judged by the impact of that activity on all of these people and on society at large.

Another myth that needs attention is the belief that excessive concentration of corporate power is eliminating competition, and that as a result the consumer is being ripped off and the economy is being damaged.

One aspect of this myth is the belief that several large companies, by virtue of holding a large share of the market, necessarily exercise undue dominance and control of the market. Take, for instance, the "big three" auto-makers, who share 70% of the Canadian market. The fact is that there are more than twenty different automobile manufacturers in the Canadian market, and there is no law that says people have to buy 70% of their cars from the big three. There is also no guarantee that the big three will win 70% of the "consumer vote" in any given year.

By the same token, the auto manufacturers cannot impose their models upon an unwilling consumer public. Recent experience has included a fundamental and radical change in model production, as a response to consumer preference for smaller and more economical cars such as those offered by several "non-big three" companies. This particular example contradicts the thesis that the smaller firms, by virtue of their size, are not really competitive and cannot act as a check on the power of the so-called "dominant" companies.

There appears to be a tendency, on the part of critics of business, when speaking of concentration, to employ total Canadian production as a yardstick for purposes of comparison; in so doing, they choose to ignore or to minimize the significant impact of foreign competition, both actual and potential, and of competition from other products.

Residential steel siding, for instance, is produced by an industry where two companies account for 80 per cent of Canadian production. The reality, however, is that many other products, both domestic and foreign, can be substituted for steel siding: asbestos, aluminum, wood, brick, plastic, stone, glass, concrete and fiberglass.

The Canadian market is exposed to competition at almost every point. The impact of import competition is affected by geography, transportation, legal and business regulations and conditions, "spill-over" advertising, and so on. To imply that a Canadian manufacturer, no matter how large, only competes against other Canadian manufacturers is simply naive. The relative size and the relative degree of concentration, therefore, must be measured against the background of a global market.

In many industries, especially high-technology industries that have been singled out by government as being highly desirable for Canada; a certain minimum scale is required to support the on-going research and development necessary to the maintenance of a world competitive position. This minimum scale may appear large, or may result in an apparently high degree of concentration in a Canadian framework, but it must be evaluated in terms of a company's or industry's ability to compete against imports from larger international companies and, as well, in the export field.

In the Chamber's brief to the Bryce Commission, we said that total concentration--the relative importance of the largest companies in relation to all companies sharing the Canadian market--had declined. According to the government's own published statistics, the hundred largest companies in 1933 accounted for 65 per cent of the total capital of all companies. By 1965, this had declined to about 38 per cent of total capital.

As for industry concentration--the domestic importance of the largest firms in each Canadian industry--we said such concentration is the rule and not the exception in Canada, and everywhere else except where there is a state monopoly; that there has always been a trend toward concentration; that in spite of this the amount of choice to the consumer and the amount of competition among competing brands has remained surprisingly constant. The Chamber's view is that this trend is natural, inevitable and usually beneficial.

The trend towards greater industry concentration does not appear to have done us any harm. The Canadian economic system has certainly worked well in bringing down the real cost of products in terms of the length of time an average worker must work in order to pay for one unit of the product. In our brief to the Bryce Commission, we challenged critics to name a single commodity, the real cost of which has not fallen dramatically over time.

The achievement of lower real costs of products has not been at the expense of quality. Automobile tires are safer and last longer. Upholstery fabrics last longer, and are easier to keep clean. The quality of music that can be reproduced in the home has improved steadily.

Another myth that needs to be dealt with is the belief that the rich are getting richer and the poor poorer.

Until fairly recently, official statistics, based on annual survey data, tended to show that the percentage of money income going to the poor--say the poorest one-fifth of the population--was staying pretty well constant, with no tendency for the money gap between the rich and the poor to be narrowed.

In September 1975, U.S. economist Professor Morton Paglin produced a sophisticated study based on a comparison of lifetime incomes rather than annual incomes, and concluded that there has been an important redistribution of the money income pie from rich families to poor families.

A Canadian study was undertaken by Dr. Armstrong and professors Friesen and Miller at McGill, to see whether the Paglin analysis applied in Canada, and they concluded that it did. The reduction of income inequality of lifetime earnings from 1951 to 1975 was found to be at least 10%, but more likely of the order of 20%.

In the area of trends in redistribution of wealth, as opposed to income, Professor Armstrong and his colleagues calculated that when the net worth and asset value of government and private pensions are taken into account, inequality of the distribution of assets declined about 24% from 1964 to 1970.

While there are many other myths circulating in our society, I will mention just one more--the myth of the golden past--the belief that everything was better in the good old days. In sentimentalizing the past, people forget that in the good old days real wages were lower, working conditions were poorer, clothing was itchier, there was no anaesthetic for surgery and not many people washed. The image of the craftsman fulfilling his creative powers by building a complete product all by himself applied only in a tiny fraction of cases. The great majority spent their time pounding, hacking, hewing, hammering, carting, chipping, chopping, and flailing, and then retiring to an early grave.

I have spent some time talking about the myths and misconceptions about business and economics. The question at this point is, what can we do to correct the situation? What can you do? And what can I do?

There are several courses of action which come to mind. One approach that might be tried would be to draw all businesses in Canada together in a massive communication program and flood the public with information on the business side of the story concerning these misunderstandings.

It appears doubtful that such a campaign will ever be launched, because of the massive organization job and huge amounts of money that would be required.

A second approach might be to direct our efforts toward the young people of the country while they are in elementary and secondary school, to try and ensure that by the time they enter the work force they will have had these myths dispelled. A few years ago, the Canadian Chamber, along with certain other organizations, was a co-founder of the Canadian Foundation for Economic Education. This foundation is, within the limits of the resources available to it, doing a good job in the time-consuming task of economic education. There is no doubt that these efforts will, in the long term, do much good. However, in my view, we cannot afford to wait to get the general public better informed.

A third approach, and the one that appears to me to be the most promising, is communication with employees in the work place. In my view, this is a program that is manageable and can prove most effective. There are a number of reasons for this.

1. The huge job of reaching people could be brought within the realm of practical cost feasibility.
2. The task of providing specific facts and figures would be facilitated. Individual companies could, for instance, develop their own hard data as to real gains in wages and fringe benefits, improvements in working conditions, decline in the real cost of its products to consumers, and so on.
3. Away from the work place, there is competition for the attention of the employee from TV football games and other attractions. In the work place, the only competition is from work, and this is under the control of the employer.
4. The work place provides the possibility of communication on a regular basis.

A major obstacle to good communications with employees is the militant union which objects to direct communications between the company and its employees. The union bosses want all communications channelled through them, ostensibly to ensure that the company will not put one over on the employees or do any "brainwashing".

All we can say about this difficulty is that it makes our job ten times harder. Perhaps one day there will be a human relations policy advocate, who will have power to investigate a union and bring it before a human relations board on a charge of pursuing policies that restrain growth of friendly relations between employer and employee, to the detriment of the general public.

In the meantime, it is just one more difficulty to add to the many others we must face.

The end result which we are really trying to achieve is to change public attitudes toward our market economy system. Public attitudes do influence government policy. It is government policy that establishes the framework within which we operate and which will determine the direction of the economy of this country.

With our present economic problems of high unemployment, a high rate of inflation, international monetary deficits, and so on, people are concerned about the future. Employees are concerned about their jobs, and about the creation of new jobs to absorb the growing numbers of young people reaching the age at which they would normally enter the work force. Employees are concerned about whether their pensions will be adequate to maintain them when they reach retirement age.

Perhaps there is no better time than now to embark upon a communications program with our employees to tell them the story of how the economy really operates.

If we are to embark upon an internal communications program, we must be prepared to work hard at it, and to conduct it in a professional manner. We must also recognize that good communication is a two-way street, and be prepared to listen as well as to talk. It is vital that our statements have the highest possible credibility. We are dealing with people who don't quite trust us, and who will tend to receive our statements with large grains of salt. We must ensure that our communications are totally truthful, that our reasoning is flawless, that our statistics are accurate, based on unbiased methodology and not presented in a misleading manner.

Most of all, we must avoid simplistic approaches that breed scepticism. If we say, for instance, that we must get rid of government control and regulation of business, nobody will pay any attention. But if we can say that this particular law or regulation is detrimental to the health of a particular industry or to the economy generally, and therefore will have an impact on future jobs, we may get a hearing.

There clearly is a need for those of us who believe in a free market economy, and who want to see it preserved, to take action to dispel these myths and misconceptions about business and economics. Each of us does have an opportunity to put in place a communications program within our own company. The challenge is there and we must seize it.

In contemplating the kind of effort that lies before us, I think we have to bear in mind that as we go along, there will be many defeats, but there are also victories waiting to be won. As William James put it:

A shipwrecked sailor, buried on this coast, bids you set sail.

For many a gallant bark, when we were lost, weathered the gale.

The appreciation of the audience was expressed by Mr. Robert L. Armstrong, a Past President of The Empire Club of Canada.