BOOK REVIEW

From economic aristocracy to economic democracy

The Divine Right of Capital

Marjorie Kelly
Berrett-Koehler Publishers Inc., 2001
ISBN 1 57675-125-2 (hb) £18.99
ISBN 1 57675-237-2 (pb) £13.99

review by Adrain MacFhearraigh and Catherine Ansbro

Before communities around the world can become sustainable, business practices must become democratic rather than aristocratic. That is the main message of The Divine Right of Capital, an excellent analysis of the way the business and economic systems operate and how they can be improved.

The book's author, Marjorie Kelly, has a long history of involvement in the economics of sustainability. She is the cofounder and editor of Business Ethics, a U.S. magazine that has focused on new approaches to responsible business practices since 1987.

In the course of her editorship, though, Kelly has changed her mind about how such practices can become established most effectively. Initially she believed that change would come about because progressive businesspeople were voluntarily transforming capitalism by supporting corporate social responsibility, which entailed actions such as better environmental stewardship, family-friendly policies, employee profit sharing and good corporate citizenship.

However, after monitoring a decade of this type of 'change', Kelly saw that it was merely cosmetic. While acknowledging that some visionary business founders had brought about important changes in a small number of firms, these progressive practices quickly died out once the business was sold on. Moreover, these few responsible businesses were not bringing about systemic change within the general corporate community, which continued following the goal of maximizing profits for shareholders, regardless of the impact on employees, the environment or the public good. Kelly became convinced the problem was systemic, the result of historical and legal factors. She now believes that deep and lasting change in business practices will not come about until we change the legal factors that guide how businesses operate. The Divine Right of Capital outlines these factors and shows the way to bring about real, deep-down change in business practices and in local and global economies.

For example, the book emphasises the overwhelming influence that ³fiduciary duty² has on a way a company is run. Currently, in Ireland as elsewhere, this ³duty of trust² placed on a company's management is almost always limited to maximizing financial returns to the shareholders. Other parties linked to the company‹employees, environment, and local and global communities‹ are not considered except to the extent that a failure to act would risk financial liabilities that would reduce shareholder profits. Thus, as the law stands, if boards of directors were to consider factors like employee well-being, environment, or public good in their decision-making, rather than shareholder profits, they could be sued by shareholders for not upholding their duty of trust in looking after their financial interests. As a result our present style of accountancy only evaluates financial bottom lines and profits. This has created a system that ignores the full impact of business activities.

Kelly points out that this current system is fundamentally aristocratic and inherently undemocratic in nature, a holdover from medieval times. She gives a fascinating presentation of the social structures, privileges and power held by the elite ruling class in Medieval Europe. Throughout the book she builds up a compelling comparison of our present system of wealth distribution, commonly called economy, and the social system of Medieval Europe. This comparison gives rise to the recognition that our current system is an Economic Aristocracy.

According to Kelly, this Economic Aristocracy has six principles:

1. worldview- it aims to pay shareholders as much as possible and employees as little as possible;
2. privilege- shareholders, just like nobles, claim wealth they do little to create;
3. property- a corporation, like a feudal estate, is a piece of property, not a community, and can be owned and sold by the propertied class;
4. governance- corporations have an aristocratic governance structure which implies that those who own the corporation are the only group entitled to vote on decisions determining the future of the corporation;
5. liberty- this is preserved for the property owners only;
6. sovereignty- corporations assert they are private and the free market will self-regulate them, just like barons asserted they were independent of the Crown.

Kelly shows that since medieval times, laws permitted change from a political perspective but not from a wealth one. As a result, laws governing economic and business behaviour continue to preserve age-old wealth inequalities. So, while in the political sphere, aristocracy was eclipsed by democracy, the world of wealth and property has remained untouched. As a result, while we would never tolerate medieval practices in our current political system (imagine "King Bertie" ruling by divine mandate, without public representatives or elections), we have not recognized our economic system for what it is: an historical anachronism of an inherently aristocratic nature.

Kelly therefore proposes that our economics must become democratic. This is what will bring about systemic changes that support ethical businesses. She proposes six principles of Economic Democracy to counter each of the six characteristics of the Economic Aristocracy:

1. enlightenment - all persons are created equal and therefore the economic rights of employees and the community equal those of the owners of capital;
2. equality - the wealth created by a company does not only belong to its shareholders but to all those who create it. Community wealth (e.g., natural resources) belongs to us all;
3. public good - public corporations are more than pieces of property or private contracts, they have a responsibility to the public good;
4. democracy - a corporation is a human community and like the larger community of which it is a part it is best governed democratically;
5. justice - the wealthy may not claim greater rights than others and corporations may not claim the rights of persons;
6. (r)evolution - just as the people have the right to alter or abolish government it is equally their right to alter or abolish the corporations that now govern the world. Kelly puts the 'r' in brackets as we have done to emphasise that this principle is an evolution with the spirit of a revolution.

Kelly points out that our unquestioning attitude towards the current system is a major factor holding up our progress to a more sustainable future. In medieval times no one questioned the right of the king or the aristocracy to rule, or their right to collect taxes and other wealth from the peasants and/or middle classes who created it. Everyone just accepted that this was the divine right of the monarchy. In a similar way, we have accepted without question company laws that enshrine the rights of the Economic Aristocracy to create more wealth for themselves that is not of their own making.

Kelly's book presents eye-opening facts from up-to-date sources and is so interesting that we both found it hard to put down. Moreover it is beautifully written in a style that makes it a very easy read for general readers and economists alike.

Pointing out the changes in business law that have recently been made in Europe and some states in the USA, the book will provide its readers with important information about the legal changes we need to focus on politically in order to create a culture of responsible and sustainable business activity. It equips us to embark on a journey to install democratic principles and breathe life into the heart and soul of a new kind of economy.