Ethics, Business, and Land

My father John C. Lincoln (1866-1959) had a strong code of ethics that played a prominent role in both his practice of business and his ideas about land. In 1895 he founded the Lincoln Electric Company of Cleveland, Ohio, which became the world’s leading manufacturer of arc welding equipment. He drew his ideas about land from the 1879 book Progress and Poverty, by the American political economist and social philosopher Henry George.

My father’s core ethical principle was to treat people as you would like to be treated. This implied the following precepts:

1) Treat people with absolute fairness. This means all people. In business it includes all the constituents of a company—employees, customers, owners, and the community. In society it means government must treat individuals fairly, and vice versa.

2) Whoever creates something should be entitled to keep it. Receiving the fruits of someone else’s labor—a windfall—often occurs. But for each windfall there is a wipeout—someone doesn’t get all he or she produced. Both the windfall and the wipeout are unethical.

3) People are important. They should be treated with respect and dignity, not as machines or cogs in a wheel.

Ethics in Business

Largely as a result of following these principles, the Lincoln Electric Company has demonstrated superior performance for its entire 100-year history. Many things have to happen to run a business ethically. One of them is making an adequate profit, which benefits the shareholders. But in my opinion, any company and all its constituents are better served if the customer comes first.

At Lincoln Electric, most employees are on piece work. If they produce more, they get more. The company has an annual bonus program, and the kitty for this bonus is composed of the extra profit beyond the returns required to run the business. Running the business includes providing a fair but not excessive dividend to shareholders and investing in new products and production methods. Beyond these costs, employees at Lincoln Electric get to keep any extra profit they produce. Recently bonuses have been about 50 to 60 percent of annual salaries. There are no windfalls, and no wipeouts.

Nowadays, manufacturing is no longer as much the “thing” as it once was. Making Lincoln Electric a successful global company requires more emphasis on company-wide teams. Individual pay is more dependent upon cooperation across departmental lines. This can work just as well as more individual programs of the past, but it is more difficult to manage. Incentives must be tailored to each location where we operate.

Ethics in Land

The heritage of the Lincoln Institute of Land Policy stems from my father’s interest in the ideas of Henry George, especially the land value tax. The ethics of this tax concept are parallel to those used at Lincoln Electric.

Someone who works the land should be entitled to keep the fruits of his labor. If he produces more because of increased skill or effort, he should reap a higher reward. However, Henry George said that land is a natural monopoly. Its value is largely created by things unrelated to the actions of the land’s owner, such as population pressure or mineral deposits. The landowner or user has nothing to do with these factors, yet if they cause the land value to increase, the owner gets a windfall.

This ethical dilemma disturbed my father, as it disturbs me. He subscribed to the remedy proposed by Henry George, which is to take as a tax each year the full rental value of land produced by natural or social factors. This would eliminate the windfall. It would still leave for landowners and users the value created by their own investments and labor.

A hundred years ago land was considered one of the three factors of production, along with labor and capital. Land was essential as both a place to work and a source of raw materials. Things are more complex today. A great deal of the economy has to do with telecommunications and computer software, which allow businesses to locate anywhere and use few or inexpensive natural resources. These changes may not negate the basic economic theories of Henry George’s time, but they do make it a bit more difficult to analyze the role of land in the economy.

There are many positive illustrations that ethical business practices lead to economic success. Unfortunately, there are not clearcut illustrations showing that land value taxation produces broad economic benefits. Nevertheless, economic research suggests that land value taxation could encourage the productive and careful use of land. Individuals who used the land in ways that increased its production would be able to keep the full value they had created, and society would keep the value it created.

I believe ethical practices will benefit all sides in any transaction. Ethical land taxation should lead to an improved economy, just as ethical business practices lead to more successful companies. One should get to keep the fruits of one’s labor, but the fruits of speculation or monopolies should accrue to the community as a whole, not to individuals as windfalls. Both the private sector and the public sector would benefit. Good ethics is good business. Good ethics is good for society as well as the economy.

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David C. Lincoln, president of the Lincoln Foundation and former chairman of the Lincoln Institute, presented the annual Founder’s Day lecture on August 1 at Lincoln House. He had served as chairman for the Institute’s first 22 years before stepping down in May 1996. His talk, excerpted here in part, commemorated the 130th anniversary of the birth of his father, John Cromwell Lincoln, the Cleveland, Ohio, industrialist who founded the Lincoln Foundation in 1947.