Saturday, April 23, 2011

The Four Per Cent Solution

Provided, nevertheless, that capital shall never receive profits exceeding an annual amount equal to six percent per annum simple interest for the whole time of its investment in the funds of the Community.

                        Initial Constitution of the Fraternal Communion
Rule 97
            Enough is never enough.
Rule 242
            More is good ….. all is better.

             Ferengi Rules of Acquisition

            A few times, I’ve been asked how I ended up doing what I do.  My most common answer is poor guidance in high school.  At the end of my freshman year in high school, having done well, I was allowed to choose whether I should go into Classics Honors or Science Honors.  This being a weighty decision for a fourteen year old, I asked the advice of my homeroom teacher.  Mr. Lux was a scholastic, a step in the arduous process of becoming a Jesuit priest.  He advised me to go for Classics Honors.  Years later it dawned on me that not only was he my homeroom teacher, he was also my Latin teacher.  Thus I ended up going to a liberal arts college, with a liberal arts major, English, which I subsequently switched to History.  I had to give up on English, because I thought Moby Dick was a book about guys involved in the whaling industry.

            After graduating, I was a VISTA and a graduate student in history.  Being a graduate student in history was an iffy proposition in the 70’s, but I had developed a back up plan.  One of my roommates was an accounting major.  The college periodically thought about getting rid of its accounting program, as it seemed inconsistent with its liberal arts philosophy to have a major that qualified you for a decent job without going to graduate school.  I noted, however, that my roommate and his pals were getting good jobs and that they didn’t seem brighter than me .  I guess they got good guidance in high school.

            Thus, at the rather advanced age of 27, I found myself at an interview to commence my career in public accounting.  (Years later I would have reformed hippies, somewhat older than myself reporting to me as they commenced in their late thirties or early forties).  I was being interviewed by two partners in one of the largest accounting firms in the city of Worcester.  One was the managing partner and the other was the most junior of the then 5 partners.  Subsequently after years of observation, I realized that the managing partner had synthesized 35 years of business experience into two fundamental principles “Money coming in is good.  Money going out is bad.”  At my first meeting with him I did not recognize the brilliant simplicity that he embodied.  He asked me two questions to test my knowledge.  The one that is germane to our topic today was “Someone buys a piece of equipment for $10,000.  What is the most depreciation that he can take in the first year?”

            I pondered the question.  My fate hung in the balance.  The managing partner was heading to the conclusion that I was too ignorant to work for his firm.  The young partner said, “What are you thinking about?”  I replied, “I’m trying to tell whether sum of the years digits is faster than double declining balance.”  At that moment, I established myself as a deep thinker, with all the good and bad things associated with that.  I was the last person to ever become a partner in that firm and am now a partner in the successor firm, which is one of the largest in the region.

            I was most interested in American history in the 19th Century.  I was a member of the Unitarian Congregation of Mendon and Uxbridge for 15 years.  My career in public accounting commenced in part from my knowledge of a somewhat obscure method of depreciation.  From these elements come my fascination with the story of Adin Ballou and his community.

            If Adin Ballou had never lived and somebody made him up in an historical novel, I would end up scoffing at it.  This is another one of those books where everything that happened happens to somebody in the book.  Like War and Remembrance where you have a Holocaust victim married to a US submarine skipper, whose father goes to the Soviet Union to check on Lend lease after the ship he was supposed to command was sunk at Pearl harbor, not to mention the mother-in-law having an affair with somebody involved with the Manhattan project.  With Adin Ballou its temperance, pacifism, abolitionism, communal experiments, spiritualism, capitalism, the Civil War and on and on.  He was a Universalist and a Unitarian, 100 years before the merger.  You can accept him knowing William Lloyd Garrison and Frederick Douglas and all those guys.  They didn’t exactly hang out together, but people went from one community to another.  Fine, that’s believable.  But Tolstoy.  That’s a bit of a stretch.  But here it is in the Kingdom of God is within You, one of the three books Gandhi followed in his non-resistance campaign, with regard to non-resistance “Ballou’s work confirmed me still more in this view.  But the fate of Garrison, still more of Ballou, is being completely unrecognized.”

            The real punch line for me though is the depreciation.  Brilliant as he was, Ballou had no grasp of the eternal truths embodied in the Ferengi Rules of Acquisition.  For those of you who do not know who the Ferengi are, a small explanation is in order.  In the future contemplated in the various Star Trek series (Star Trek, Star Trek Next Generation, Star Trek Voyager, Abbot And Costello Meet Star Trek) humans have experienced some of the moral evolution hoped for and expected by Ballou and Tolstoy.  People like that can be kind of boring, so some of our more interesting characteristics are laid off onto alien races.  The Ferengi are noted for greed and devotion to profit, to them a religious concept.  They would have felt right at home in the America of the 1830’s which Alexis de Tocqueville observed was like a vast workshop with a large sign reading “No admittance except on business “ and he also observed “An American navigator leaves Boston to go and buy tea in China.  He arrives at Canton, stays a few days there, and comes back. In less than two years he has gone around the globe and only once has he seen land.  Throughout a voyage of eight or ten months he has drunk brackish water and eaten salted meat; he has striven against the sea, disease and boredom; but on his return he can sell tea a farthing cheaper than an English merchant.  He has achieved his aim.  I cannot express my thoughts better than by saying the Americans put something heroic into their way of trading”.  If I remember correctly, the first time Ferengi were encountered, it was observed by Mr. Spock that they were quite like Yankee traders.

Adin Ballou, at least while in his corporeal form, never watched Star Trek. (It may now be one of his favorite shows.  He did think that it was acceptable to gently restrain people, so “Set your phasers on stun” might sound OK to him).  He did meet a Ferengi, though.  Had Adin been familiar with rules 255 and 256, he might have done a bit better.  Those rules, but the way are

A wife is a luxury; a smart accountant is a necessity.  
Accountants do not play the game, they just keep score.

            As the thoughts to ponder and what I have said so far might lead you to believe I intend to talk about Ballou’s economic theories.  It might seem more timely to talk about his pacifism, but his pacifism was much more radical than opposition to military action.  He was opposed to any coercion.  All his principles, though, I think are rooted in his restorationist theology, which has a perfectionist streak in.  Like Tolstoy and Gandhi, he was tells us that Jesus was giving people practical advice about how to live.  The roots of the thinking are probably a bit too deep to go into and there’s a good chance I’ll get them wrong, but in some sense, the message is “Just do it”.  Get a group of people together who agree to “never, under any pretext whatsoever, to kill, assault, beat, torture, enslave, rob, oppress, persecute, defraud, corrupt, slander, revile, injure, envy or hate any human being even my worst enemy”/ (Don’t you love those lists.)  And work out the details as you go.  In my opinion, Ballou did much better on the practical piece than either of his successors.  Tolstoy spent his final years trying to live like a peasant and his friends had to look out for his wife.  It was said that India’s Congress party had to go to enormous expense to maintain Gandhi in poverty.

            Taking from the rich and giving to the poor was not the path chosen, though some advocated it.  Fraternal Communion Number One of the Practical Christian Republic started out with 28 people living in one house.  Despite their sharing high aspirations they got on one another’s nerves.  It was planned that as they were able they would put up more residences.  It was thought by some that the fair thing to do would be to have the people who didn’t put up any money be the first ones to move into individual dwellings.  After all Jesus had said “The first shall be last”.  Instead, the community adopted an economic model that allowed wages up to those paid a first class operative and a return on capital invested of 6%, later 4%.  Thus they avoided the Scylla of Communism and drove some of the Robin Hood contingent out followed not long after by Brian Lamson who insisted that nursing mothers should be credited with 16 hours of labor a day.

The community never became an economic powerhouse, but with tweaking of the return on capital and the rate paid labor, it moved a long quite nicely modeling its principles.  Outsiders had predicted that they would be subject to a rash of thefts by outsiders since the community members were pledged not to defend their property by the threat of violence by either themselves or the authorities.  Events vindicated the community in this regard.  When young people went on a wave of stealing and vandalism, after some initial forays they gave up on Hopedale, because it wasn’t as satisfying to steal from people who weren’t trying to prevent it.

When it came to the way young boys were treated when they left the community, it was a different story.  They were picked on for the odd views of their parents.  Their fate cannot be seen as a refutation of non-resistance, since one of them confessed in his memoirs that when they were arrayed in adequate number they dropped their non-resistant principles.  This was William Draper, who having grown up in pacifist, temperance community, would rise to the rank of Brigadier General and on at least one occasion give his men whiskey to keep them warm on a cold night.

The capital labor issue would not have been so significant, perhaps, had the capital been spread out more.  It was, however, highly concentrated in the hands of Adin’s close friend Ebenezer Draper.  Adin thought that Ebenezer was a great businessman, but there is some doubt on the issue.  He may have been an illustration of the rule that it is better to be lucky than good.  Most of his income was the result of a patent that his father had created.  He was devoted to the ideals of the community and he put his money where his mouth was.

Adin’s brother George, who joined the community near the end, was a different kettle of fish.  He was a great businessman, a Ferengi class businessman.  His wife refused to become a member.  She found the egalitarianism offensive.  Her son related in his memoirs an incident early in her residence in the village.  A group of members came to her house to greet her.  One of them scolded her for having an upholstered chair indicating that most of those in Hopedale made due with much more plain furniture.  William, the son, indicated that his father did not object in principle to the relative egalitarianism of the community, but he was frustrated by the unbusiness-like decisions that the one member one vote system produced.

The crisis that ended the community in its initial form came in 1856.  The initial report from the treasurer indicated that there was a small deficit $145.15.  The joint stock (that is the equity invested by members) was $41,300.  In the History of the Hopedale Community Adin goes on to comment “that a shrewd businessman could or an expert in finance could actually see that the community’s liabilities exceeded its assets by several thousand dollars.”  The two major adjustments to the deficit were the dividend of 4% and an allowance for depreciation. 

            William Draper, in his memoirs, made much of the depreciation .  He makes much of the tale surely handed from father to son of a particular tool.  The tool had not only had no depreciation recorded on it, but the costs of repairing it had been capitalized so that the used tool was carried on the books at substantially more than the likely cost of a brand new replacement.  It’s the kind of thing that got World Com in trouble (Enron’s a different story).  George Draper was willing to step up and pay the other shareholders face value for their stock in spite of this.  What a guy.

            Well, 146 years too late, I’d like to be Adin Ballou’s smart accountant, the one he would have had if he followed rule 255.  All, I’ve got to go on is the balance sheet in the History of the Hopedale Community that shows assets at 12/31/1855 of $65,275.09 Included in making up this total is box branch tools of $290.25, less than ½ of 1% of the assets.  Auditors have a word for a number like that.  Immaterial.  Besides, when you go into liquidation mode, book value goes out the window; you look at fair market value.  Is their some chance that perhaps the $59,000 book value of real estate had appreciated?  Perhaps a “shrewd businessman” might have factored that in to his decision-making.   .  . I mean this was a fellow who would subsequently buy his brother’s half of the business and sell it to his son at a profit.  (William resented this at the time, but in retrospect felt that it had helped build his character) Rule 256 had been violated.  In pointing out these issues George was acting as the scorekeeper, while he was playing the game.

            Tocqueville asked an American sailor why American ships were built somewhat shoddily such that they could not be expected to last a long time.  The sailor replied that advances in navigation and ship design would make them obsolete before they wore out.  Capitalism is dynamic.  It creates by destroying.  You can’t put it in a stable 4% box. Originally, the 4% was a ceiling, but in successive changes to the charter, it became a guarantee.  Adin thought that by making people certain of the 4%, they would be content with it.  It was a profound misunderstanding.

            Ballou and Tolstoy thought we were getting better.  Some times I think we are getting worse.  I call us the cash out generation.    Philanthropic innovations of the 19th Century such as mutual savings banks, mutual insurance companies and not for profit hospitals have been gobbled up by the Ferengi.  Even the public accounting profession cashed out to some extent, but at that point capitalism becomes like a snake eating its own tail.  But ___ I often think that people who believe we are living in the worst of times just don’t history very well.

            At a meeting once I referred to Adin Ballou’s spirit being among us.  Someone said, “Of course, you mean he lives on through us.”  I meant it literally.  I don’t hear voices, but there is not much point in hearing voices.  They’re as likely to be feeding you bad information as good information.

            William Draper paid for a statue of Adin Ballou (after making sure others were acquiring the land and grading it).  When we look back on the time of Adin Ballou, we are horrified that our country had an economy of which slavery was a significant part and our deeply disturbed by the virulent racism.  It is really hard for us to appreciate that the people who were in favor of the immediate abolition of slavery and racial equality were far out extremists.  Adin Ballou was even further out than they were, because non-violence was part of the package that they were willing to release, but he wasn’t.  One dead soldier for every six slaves freed left a legacy of bitterness that we still deal with.

He also thought the economic beast could be tamed by moral suasion rather than coercion.  The legacy of the community lived on in the welfare capitalism of Draper Industries that made Hopedale a model well into the 20th Century.

We really are getting better.  Just do it.

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