Bob Dain Brings Vintage Guitars and Local Equipment Back to Bridgeport

 312 Vintage Guitars has only been open for 4 months, and it is already on the map. It’s been featured on DNA Info, mentioned in TimeOut Chicago, and this Tuesday, March 26, it will play host to a live segment for the You and Me This Morning show on WCIU.

Its 35th Street location doesn’t see crowds of pedestrians strolling past, but it is visible to streams of drivers making their way to the Dan Ryan Expressway, and it’s the kind of shop drivers will stop for. Owner Bob Dain, age 26, says he watched one customer drive by, back up, park and walk in off the street. He bought 2 guitars on the spot – a Gibson Les Paul, because he’d had his eye out for one, and a Fender Stratocaster, because he liked the price. He paid over a thousand for each instrument, then went back on his way.

Dain’s career, in fact the span of his life, fits within the emerging market for vintage guitars. The year he was born, Gibson Guitar was a tired brand struggling under foreign ownership and a diminished reputation, production was down to 1 model of electric guitar, and the company was bleeding money. That was 1986, the year Gibson was purchased by a couple young guys with business degrees. Their turn-around plan centered on the company’s heritage, and the reissue of “classic” guitars.

By 1994, the heritage plan was working. Sales had multiplied sevenfold and CEO Henry Juszkiewicz was telling the New York Times he had visions of making Gibson the biggest instrument maker in the United States – a position once traded among Chicago firms.

The Chicago makers lost their lead in the 1960s and 70s, when the center of guitar manufacture moved to Asia. But in the 1980s, Asian buyers holding strong currency also had an appreciation for old American made instruments, and prices were on the rise.

In 1999 Eric Clapton auctioned 100 of his instruments to raise money for a drug and alcohol recovery center, and set record prices. One of his Fender Stratocasters raised $450,000. In 2001, when he held a second auction, retail giant Guitar Center paid $959,000 for his favorite Stratocaster, then made its money back by selling well made copies of it.

Reissues of classic designs, peppered with fabulous prices for celebrity instruments, stoked a market for originals through the 2000s, or at least through that part that was exuberant. Looking back in 2011, Guitar Afficionado observed that a vintage Les Paul Gold Top Gibson was worth $5,500 in 2002; 4 years later, in 2006, the same instrument could fetch $85,000. Then the price crashed to about $30,000, so if you’d bought it in 2002 you’d still be pretty happy, maybe less so if you’d bought it much later than that. Today, Dain says a top quality equivalent from the late 1950s might raise $50-60,000 at auction.

Dain is a musician himself, his band, The Sweeps, plays clubs from Simone’s to the Double Door. He plays vintage instruments, but he is less likely to buy a rarefied specimen in perfect condition than to buy something that is interesting for other reasons, and modify it for his own use.

Dain bought his first vintage guitar at a church estate sale when he was 15, a couple years after Guitar Center bought its Clapton Stratocaster. Vintage Gibson’s were beyond reach for most teenagers by then. Dain bought an Airline brand electric guitar, made by Chicago based Valco Manufacturing Company in the 1950s and 1960s. Dain describes it as having a particular tone, playability, and a “New Agey, Jetson’s type” look. Today, big names like Jack White of the White Stripes and Dan Auerbach of the Black Keys play them. But back then, he says, they were still undervalued.

Dain’s been buying and selling vintage instruments ever since. The crash in prices in the late 2000s made a lot more bargains available. And the market has widened, buyers have come to appreciate more instruments, for more various reasons.

Dain recently sold a Grestch Fury amplifier built by Valco in 1968. Valco was known for its mid-market brands. In 1968 it was going out of business, it assembled the Gretsch Fury from parts it had lying around the warehouse. Today the amp is hard to find, but it’s also appreciated for its clear sound, and the fact it handles effects pedals very well, a quality that wasn’t realized in 1968.

Dain sold the Fury over the internet for $1,800, even though he says they can fetch $2,500 - $3,000, depending on their condition. He says the guy who bought it from him turned around and posted it on a European classifieds list for $5,500.

From the 19th Century, Chicago was a dominant force in the mass production of musical instruments of all kinds, and for some of the same reasons it came to dominate other industries: its innovation in modern production techniques, its situation as a logistical center, but also its place as world capital of the mail order catalog. The catalogs all offered large selections of instruments. In fact Sears Roebuck & Co once acquired the Harmony Company, one of the nation’s largest instrument makers, in a bid to corner the ukelele market. The Airline guitar Dain first bought was a brand that Valco made for Montgomery Ward.

Amplified guitars were developed on parallel tracks in Chicago and Los Angeles in the 1920s, partly to make them audible through the din of dance orchestras. In Los Angeles, the National String Instrument and Dobro Manufacturing companies both developed self-ampliphonics, but the Chicago firm Stromberg-Voisinet, which started out in the 1890s, making mandolins, is credited with making the first electric guitar for commercial production in 1928. By the mid-1930s, National and Dobro merged and migrated to Chicago to be near the center of things.

Over the next decades, Chicago’s guitar makers were a case study in agglomeration effects. Companies like Harmony, Kay (heir of Stromberg-Voisinet) and Valco (heir of National Dobro) sold guitars and amplifiers under dozens of brands, they occasionally merged, acquired or succeeded one another, and they consistently made parts, amps or whole instruments to be sold under one another’s brands.

They all prospered on the post war triumph of the guitar. They built acoustics for the folk movement, electric guitars and amps for blues and rock and roll. In the mid 1940s, the Harmony Company, which first set up shop on the present site of the Civic Opera building in 1892, moved its production to 3633 S. Racine, on the edge of Bridgeport’s Central Manufacturing District. It produced up to 350,000 instruments a year in the early 1960s – and it couldn’t produce them fast enough.

Under the British guitar band invasion, demand would not stop growing. But the fade-out of American made guitars was a staggered effect that started while sales were still peaking. One commentator observes that the Harmony Company found itself confronted with a choice between building its production capacity to meet the clamor for instruments, and making the market wait. He says it took the second option, effectively stepping aside to let cheap foreign imports fill the gap.

It was another Chicago businessman who saw the opportunity to fill that gap with inexpensive Asian made guitars. Jack Westheimer established connections with Japanese guitar makers in the 1960s, and sold them through Sears, JC Penny’s and Montgomery Wards. In the early 1973 he created a Korean based manufacturer, originally called Yoo-Ah, then Cor-Tek, it is still one of the largest guitar makers in the world.

Kay and Valco merged, then went out of business together in 1968, when Harmony’s sales were near their height. Then by the early 1970s, Harmony was struggling. Gibson was seeing record sales in the early 70s, but by 1975, Harmony stopped production, auctioned the contents of its warehouse, and licensed its name to Asian imports. In 2009, the Northbrook based Westheimer Corporation bought the name back and has began to reissue a series of “classic” Harmony guitars.

A decade after Harmony wound down, Bridgeport helped launch a new era of instrument manufacture. Ian Schneller, a sculptor trained at the School of the Art Institute, moved into a former lamp factory on Archer Avenue [a building his web-site describes fondly as a “labyrinth of funny little spaces”] in 1986. He began to build musical instruments, first for his own band, and for the bands of friends, under the name “Specimen Products” -- a wink to the anonymity of modern production.

Over time, especially after he’d moved shop to Wicker Park during 1994, he became known for his distinct designs and his skills as a luthier. In 2005, after years of fielding resumes from aspiring guitar builders, he launched the Chicago School of Guitar Making, which has trained over 1,000 students so far. In fact, Bob Dain was one of them. He took a class in guitar repair in 2011 to solidify skills he’d picked up working on instruments on his own.

Dain moved from the suburbs to Bridgeport in 2006, because he’d heard there were cheap rents, and because it would bring him closer to the clubs where his band plays. When he was ready to open his own retail store, Bridgeport was a natural location. There is a density of musicians in the Pilsen- Bridgeport area, he observes, including music studios at all points of the compass (from Hinge Studios in Pilsen and 35th Street Studios to the west, to Alien Audio in Canaryville) but no place to buy guitar strings. Until now.

Dain says that today, about half his sales are still made to Asian buyers over the internet. And it seems only fair that Asian buyers should help finance Bridgeport’s new guitar shop, and the synergies that are already circulating through the shop.

Pete Galanis, a Bridgeport based studio musician has arranged to teach guitar lessons at the shop; Ken Bonner, who also lives in the neighborhood, provides expert services in amplifier repair. Now Bonner is starting up his own business, Bridgeport Amplifier Co, to make boutique, hand wired equipment.

Dain’s display case features other local, small batch brands. Souldier brand guitar straps have appeared on the Grammy’s and episodes of Saturday Night Live – they are hand tooled from a manufacturing facility in the Carroll Street corridor. Daredevil is a brand of special effects pedal made from a musician’s apartment in Logan Square. Dain met the guy who makes them at a gig; he carries Daredevil’s pedals because they’re hand-wired, well finished and “do what they do very well.” Soon, he will also carry Emperor brand speaker cabinets – known for their sturdy, dovetail construction and custom sizes -- they are built from a plant in one of the historic warehouses that line Pershing Road.

Dylan Patterson, who founded Emperor Cabinets once told GearWire that Chicago is a great market for custom equipment, because nearly everyone in Chicago seems to be in some kind of band. 312 Vintage Guitars is already reaping the benefits, and doing its part to multiply the effects.

Citizens Watch

The February CAPS meeting should be packed after the masked gunman incident at Kevin’s Hamburger Heaven last week. Lots of people will want to know if the police have made any progress in the case, and what they’re doing about all these criminals coming into the neighborhood to rob and shoot people in general.

So far, the comments on EveryBlock range from reminiscence about the old days, when everyone knew each other and handled a lot of mischief and thuggery without calling the police, to calls to shut down those Pershing Road truck stops altogether. They’ve been a magnet for big scary guys for years before this happened. Is it true that Kevin’s Hamburger Heaven keeps armed security? Someone mentioned it on EveryBlock, but I’m probably not going to trot over there to confirm.

I feel like I owe some kind of Hardscrabbler amends though, because when I wrote about public safety issues last summer I made it sound like there were a lot of hysterical people overly worried about criminals coming in from other neighborhoods, and that was distracting them from our real crime problems, which originate here.

Then, over the next 6 months there was a long list of predatory incidents confirmed by police, most of them in broad daylight – a rash of people held up for their smart phones, an attempted carjacking, a couple drive by shootings – once I heard the shots myself at 7am on Sunday morning, and saw the blood on the sidewalk on my way to Sunday school.

I don’t want to get hysterical myself just because some of it happened close to where I live. I bet it’s still safer for a woman to walk down the street at night in Bridgeport than it is in Lincoln Park, in fact I bet that frequently. This is still a neighborhood where people know each other, and where a lot of them take personal pride in the safety of their streets.

Just before Christmas, a young Chinese woman got robbed on Princeton. She ran to the nearest random house, rang the bell, and 3 men from the house ran out and caught her assailants. You don’t necessarily want your neighbors risking direct confrontations like that, but that story, confirmed at a CAPS meeting, sure warms my heart.

A lot of people keep an eye out for trouble. Like Paul, a proud Vietnam vet – he lives east of Halsted now, but regularly patrols Morgan and Carpenter Streets in his wheelchair, those are the streets where he grew up.

And Joe, who shows up at CAPS meetings to follow up on calls he’s made. He’ll say “I saw a guy walking up my street checking out people’s gangways, so I followed him to 31st Street and from Princeton to Parnell.” It sounds different from what you might hear in other neighborhoods, or even in Bridgeport in a different era. It isn’t “I saw a black guy where he didn’t belong so I got my friends and we chased him out of the neighborhood,” but it isn’t “I saw someone trying doors in the alley, so I went home, called police and hoped it all worked out,” either.

Tom Bailey coordinates the Bridgeport Citizen’s Group’s neighborhood watch. After patrols he’ll go back on his own to paint over graffiti, or to patrol particular hot spots with his son in law late at night. He’s always looking for recruits to make more patrols, more often. If you’re concerned about crime you should talk to Tom about coordinating with his patrols – you can meet him at CAPS meetings at the 9th District station, they start at 6:30pm the 2nd Tuesday of every month.

Of course, crime is random and you can’t always catch it on patrol. It will be more effective in the long run to stop it where it lives. And there is a fair amount of trouble that lives here in Bridgeport, often in buildings with landlords who aren’t around.

Alderman Balcer helped the neighbors around 3309 S. Carpenter Street put the creeps who plagued them this summer out of that house, but bad tenants of absentee landlords aren’t limited to Carpenter, and the field of Bridgeport apartments run remotely isn’t shrinking.

The Bridgeport Citizen’s Group is lining up strategies to make landlords accountable for the tenants they keep. We’ve been turning to Canaryville for advice on how to do it. Canaryville’s neighborhood watch is almost legendary, and they have a dedicated specialist in housing court. Chris Martin has been pursuing bad landlords through the courts for 7 years. In January he and Pat Arloe, Canaryville’s Beat Representative in the Police Department, sat down with a group from Bridgeport who want to get something similar started here.

Pat and Chris work closely together to identify which they should prioritize, and to document what is wrong with them. They say that neighbors should start calling in complaints for every nuisance that occurs; they’re also creative about getting photos of code violations, and video of bad behavior. Their goal is to build a rap sheet they can use to get the building placed on the city’s troubled building list, get it inspected, and sent into court.

Chris says the Canaryville neighbors have managed to get 4 “rat-hole substandard” buildings demolished that way. But it took some persistence –in one case it took 14 court appearances, and on average, the process took 19 months.

But it doesn’t have to go that far. Chris says most landlords will go to some lengths to avoid court appearances, fines and costly repairs. They may decide to sell, or, in the best case scenario, they keep the building but change their ways.

Some of the members of Bridgeport Citizen’s Group are landlords themselves, so there has been talk about how to help those who have found themselves with bad tenants navigate the eviction process, which takes some diligence in itself.

Chris emphasizes that a landlord’s best strategy is still to screen his tenants carefully before they move in. He points out it costs just $7 to run a background search on CheckIllinois. He has occasionally actually paid to run background searches for landlords with really bad tenants, just to get them to cooperate. He says he’s never had to go to court for a landlord who lives in the neighborhood – though he adds that 4 of the worst buildings in Canaryville are owned by landlords who live right here in Bridgeport.

The Home Borrowers' Progress

By one measure after another, the housing market stuttered back to life in 2012. Home sales sped up, prices rose, new construction re-started, giving the drywall industry a boost. For New Year’s, Trulia’s chief economist observed the glut of unsold homes dropped through 2012, and predicted the question for 2013 will be at what point inventories will hit bottom, so the rebuilding can start in earnest.

Nationwide, a share of those inventories are being sopped up by investors. Frustrated by low interest rates and poor returns on other kinds of investments, they have been buying up foreclosed properties in bulk, at discount, and renting them out. That’s probably good for owners who want to sell, but less good for small buyers with less easy access to financing, and it’s not so great for the neighborhood either.

In the 1970s, financing was so scarce in urban neighborhoods, especially low income and minority ones, that Congress passed the Home Mortgage Disclosure Act, requiring banks to report where they were lending, and to whom, in detail. The numbers take awhile to assemble, regulators make them public in fall of the subsequent year, which is too late to show the latest ticks in the housing market. But it still shows how banks impact neighborhoods over time.

The activity of big investment firms won’t show up there – where they buy whole portfolios of foreclosed properties from banks, they aren’t taking out home mortgages to do it. But the HMDA reports show that investors have been buying up individual properties too. In Chicago, loans to non-occupants started to pick up in 2010; they continued their increase through 2011, even as overall mortgage lending continued to decline.

In Greater Bridgeport, the Home Mortgage Disclosures show the impact of lending practices that look like redlining in reverse. The neighborhoods south and west of Bridgeport enjoyed an abundance of loans during the boom. These tracts, spreading through Brighton Park and Back of the Yards, have lower incomes and more minorities than many tracts in the eastern part of the map. They were also the neighborhoods where loans dropped most sharply during the bust.

Of course, lending reached new heights, then plunged, almost everywhere. In the Chicago area, the boom was fueled as much by existing homeowners repositioning themselves, and sometimes cashing out new value from their homes in the process, as by actual property sales.

But after the bust, refinances were still available. They were made less frequently than at the height of the boom, but they did not drop off so sharply as home purchase loans. And they surged in 2009, the year federal, state and county programs to avert foreclosures came on line. Foreclosures mounted anyway, but the ability to refinance probably helped slow foreclosures from mounting faster. Refinances have kept far ahead of foreclosure filings across the region as a whole.

That hasn’t been true everywhere. Among the neighborhoods that surround Bridgeport, New City, the community area that combines Canaryville and Back of the Yards, makes a striking example. New City topped the chart of loans made in the area in 2005. Then it fell to the bottom of the chart.

A closer look at loans made in New City shows that refinances dropped off less sharply than home purchases, but they did less to cushion the crash than elsewhere -- the refinance revival of 2009 didn’t show up in New City at all. Foreclosures overtook home purchases quickly, they peaked in ’08 and were declining by ‘09, but they still surpass home purchase and refinance activity combined.

Something similar happened in Brighton Park – a neighborhood that rivaled New City for loans during the boom. That might make the subsequent abundance of foreclosure look like a natural outcome of excess activity during the boom.

But compare Brighton Park to the progress of the South Loop – whose high-rises stand testament to an hour of fabulous optimism. The Near South Side captures the South Loop south of Roosevelt Road. The Census shows most of its housing units were built after 2000. Home Mortgage Disclosures shows home purchases fell abruptly after 2006, but refinances lurched into the gap. Foreclosures have been on the rise in the South Loop , but they gathered steam slowly, refinances still far surpass them, they have yet to catch up with new home purchase loans.

In comparison, the Lower West Side, which captures Pilsen, south of 18th Street, was a study in moderation. Other indicators may show gentrification, but loans in the Lower West Side were made on a more modest scale than anywhere else in the Bridgeport area. Tracts in the Lower West Side share median incomes and minority populations in line with those of Back of the Yards and Brighton Park. They also share a similar pattern, if not volume, of loans: refinances dried up along with home purchase loans; foreclosures surpass them both.

Access to refinance can help avert foreclosures, so it seems unfair that borrowers in neighborhoods like Back of the Yards and Pilsen are getting fewer of them than borrowers in the South Loop. If a borrower is uncredit worthy, a refinance won’t fix that, but many loans must fall in a gray area, where banks weigh the cost of re-writing a more realistic loan against the cost of holding a foreclosed property as it deteriorates. And you would think investors would prefer to own a passel of properties in the South Loop.

At any rate, a single investor-owned property can wreak havoc on the neighborhood fabric, whether it’s vacant, or leased to tenants whose landlord can’t be reached. That has become clear in Bridgeport, where the tenants of absentee landlords have proved to be a tenacious problem on blocks of Carpenter, Lituanica, Union and Wallace.

And Bridgeport has stayed a moderate course during the boom and bust. Home purchase loans dropped after 2006, but refinances recovered. Foreclosure filings rose, they eventually reached the same rate as those in the Lower West Side, but they’ve done it gradually and then dropped off. A property in Bridgeport is still more likely to be purchased than foreclosed.

Armour Square, Bridgeport’s eastern neighbor, enjoys a similar pattern with even fewer foreclosures. McKinley Park falls somewhere between Bridgeport and Brighton Park: refinances showed some resilience, but foreclosures surpassed home purchases in 2009, and continued to do so through last year.

By 2011, residential lenders clearly favored Bridgeport. Armour Square’s loans were mostly made in Chinatown. Loans were made at a more moderate rate through Canaryville, and out the Archer corridor through McKinley Park and Brighton Park.

But overall, lending activity was still dropping in 2011. There were fewer loans in most places and in most categories than in 2010. The exception is loans to non-occupants -- those have been on the rise across the metro area for 2 years.

In the Bridgeport area, loans to non-occupants are concentrated in a few clusters, including Chinatown, and Bridgeport’s Northwest quadrant. But they are most concentrated in the census tract that falls west of Halsted Street, between 32nd Place and 35th Street -- the heart of Bridgeport’s small landlord district, it has historically had high concentrations of small apartment buildings whose owners live in the building.

Citimortgage and JPMorgan Chase are the community’s top lenders, a position they held on the eve of the financial collapse. Citimortgage made 65 loans in Bridgeport in 2011, JPMorgan Chase made 81. For comparison, locally owned Pacific Global, a Community Development Financial Institution that has ranked among Bridgeport’s top lenders throughout the boom and bust, made 30 loans in Bridgeport in 2011, less than half the volume made by each of the big banks.

They were also making different kinds of loans. The big banks were mostly refinancing loans for existing owners. All but 4 of the loans JPMorgan Chase made in Bridgeport were refinances, for instance, and a quarter of them were made to non-occupants. In fact 10 of Chase’s loans to non-occupants were concentrated in the small landlord tract west of Halsted, between 32nd and 35th. Pacific Global’s 30 loans were all loans for home purchase, they were scattered throughout the neighborhood, and only 3 of them were made to investors who wouldn’t occupy the homes.

Some Unnatural Limits on Corporate Interests

Photo: Light on Life Images

Two years ago at Thanksgiving, I was a new member of First Lutheran Church of the Trinity, and I was anticipating that we would launch some kind of visioning process in the new year, where we would plan out the future and how we would grow. That hasn’t really happened yet, in a formal way, but some visions have been coming in and out of focus as we work on other things.

Soon after that new year started, our pastor, Reverend Gaulke attended an organizing training that changed him, and affects his ministry. He’s always preached from the pulpit that God’s presence is manifest in how we treat each other, that Jesus spent his time on earth ministering to the poor, the weak and the outcast, and coaching his disciples to do the same. The training was conducted by IIRON, which organizes for social justice; it introduced him to SOUL, a group of other south side pastors with a tradition of standing up for their flocks against more powerful interests.

Since then, Pastor Gaulke has been taking part in some of SOUL’s actions, but he’s been careful about committing our church. First Trinity is not affiliated with SOUL like some other congregations are. Pastor wants the church to remain a sanctuary for people regardless of their political views. And historically, First Trinity has had a Republican tradition, especially among the older Germans who remembered Hitler as a socialist.

In the week after President Obama won the election, IIRON and SOUL joined a nationwide movement in a campaign to press the President and Congress to make the rich and corporate interests pay to fix the fiscal trap Congress set up last year.

Thursday that week, 40 pastors rallied outside the federal building, asking Senator Durbin, and all our leaders, ‘Who do you serve?’ They carried a golden calf, representing the false idol of wealth and corporate interests. Pastor Gaulke got to shatter it.

The next day, IIRON and its allies like Lakeview Action Coalition and Northside Power rallied 400 around the Federal Building while a handful of protestors went up to Senator Durbin’s office, to ask him to sign a pledge to defend Medicaid and Social Security from opposing interests. Some of them got arrested for their trouble, including Joe Hopkins, a Methodist seminarian from First Trinity. The Senator never acknowledged they were there.

I was at the Friday rally, and I think they are in the right. Not because I don’t like rich Americans, or corporate interests. In fact, I think I probably stand with most Americans in that I really like rich people, I wish we had more of them. On a civic level, having them around makes our city a more vibrant, exciting place to be; on a human level, you want to see what people who are less strapped by what they can spend can manage to achieve. In fact, on a frivolous level, I like to see what people with money to spend to extremes will go out and spend it on.

I do wish some of them took a less narrow view of what their interests are, but to a point, the narrow view isn’t entirely their fault.

Photo: Light on Life Images

Self interest was once summoned up as a moral concept. Four hundred years ago, philosophers hoped to make it a rational counterweight to the passions of aristocrats that had embroiled Europe in perpetual wars.

The passions led to a reckless chase of riches, glory and dominion; the interests would guide a more moderate, rational kind of advance. Under their influence, the ruler would recognize his prosperity was entwined with that of his subjects. And initially, his interests weren’t limited to his material prosperity alone, they included the whole field of human concerns. A person would have interests in wealth, power and influence, but also in things like health, honor and conscience.

In time, the term came to focus on a person’s interest in wealth. And in the US, a narrow focus on financial interests has created a false divide between 2 kinds of business concerns. For-profit companies defined by their pursuit of money profits flourish on one side of it; on the other is a shadow system of non-profit companies defined by their charitable purpose, by the absence of interest in profit, and, as a result, by their state of financial dependence.

Their dependence is written into the tax code. Federal tax exempt non profits that are not foundations, charged with distributing their wealth, must prove they are publicly supported by showing that most of their revenue comes from the charity of others, and not from earnings. They can raise a surplus, but they can’t distribute it to owners. That limits their ability to raise capital. Their lack of capital, and restrictions on distribution of their assets, limits their access to loans. In effect, these restrictions guarantee their staff will exhaust themselves scrounging for donations to keep the lights on.

There is no reason they can’t incorporate as for profits instead, except the risk that their interests will be narrowed to the pursuit of profit above all other things.

It is the fiduciary duty of corporate directors to show loyalty and care to the corporation’s interests. The corporation itself may define its interests in the most generous of terms. Johnson & Johnson is known for the breadth of its corporate purpose statement. It names the interests of its customers -- the doctors, nurses and parents who rely on its products -- as its first priority, followed by its employees, and the communities where they live and work. It names its duty to its stockholders last, because “when we operate according to these principals, our stockholders will realize a fair return.”

That statement was penned in 1943. By the 1960s it must not have been uncommon for corporate executives to talk freely of the social responsibility of corporations, to consider how they might help fight inflation by controlling prices, or set environmental standards above and beyond those of regulators, or find ways to hire the “hardcore unemployed.”

Because in 1970, trickle down economist Milton Friedman published an essay blasting such barbarisms in the New York Times Magazine. It was called “The Social Responsibility of Business is to Increase its Profits.” He ridiculed those businessmen he heard condoning broader goals as the “unwitting puppets” of certain intellectual forces that were undermining the basis of our free society.

Business in general can’t be said to have responsibilities, Friedman argued, only people have them. He concedes corporations, as artificial persons, may be said to have artificial responsibilities. Businessmen who run corporations clearly have real responsibilities, but those are to the owners who hire them to serve as their agents. They’re still free to fulfill their personal sense of social responsibility on their own time, and spending their own money.

But to spend someone else’s money for the public good amounts to a tax, taxation is a function of government, and only socialists believe that resources should be allocated by political mechanisms, which force people to cooperate in ways that may not even work out according to plan, and not market ones, which work when people have the freedom to judge their own interests, and to choose the transactions that serve them best.

Through the 1970s, the defense of the rights of shareholders gained momentum. And the clearest way to measure benefits for shareholders is to increase the value of their holdings, and bring them higher returns. To accomplish this, executive compensation was linked to stock performance to tie interests of management more closely to that of owners.

The shareholder movement had been reinforced by action in the courts. An accumulation of case law interprets the fiduciary duty of managers to corporate interests more narrowly as a duty to maximize the monetary of interests of shareholders. Even in cases where a corporation’s purpose statement aspires to broader goals, the possibility of being sued, and uncertainty whether consideration of other stakeholders is legally defensible, can have a discouraging effect on managers’ willingness to weigh other kinds of corporate interest – like their relationship with a community, or a well trained workforce.

In a Big Idea essay in Harvard Business Review in early 2010, Roger Martin looks back at the era of Shareholder Capitalism, compared to the era of Managerial Capitalism that preceded it, and finds shareholders haven’t actually done much better under the new regime.

In fact, he found managers delivered significantly better returns before the shareholder revolution than they did after it. He acknowledges if you fiddle with dates you can find a balance where performance was about the same, “but there is no sign shareholders did better when their interests were put first and foremost.”

[“The Age of Customer Capitalism,” Roger Martin, Harvard Business Review, January-February 2010]

Martin argues that’s because there are natural limits to shareholder value, which reflects the price shares fetch on an exchange. Stock price reflects the market’s expectations of future earnings. The best manager can only inspire expectations to rise so far before they become unrealistic. After a point, they must halt, or begin to drop. If the manager is clever, they won’t drop until the next guy’s watch.

When Jack Welch took the helm at GE in 1981, he was a vocal champion of the movement who put maximization of shareholder value above all else. And he delivered fabulous results. GE’s value was $13 billion when Welch became CEO; by the time of his retirement in 2001 it was $484 billion.

Martin says much of that growth was fueled by the expansion of GE Capital, which had been relatively insignificant before. GE Capital accounted for half GE’s earnings by the time Welch retired. Then it took such massive write-offs in the financial collapse that GE’s value dropped as low as $75 billion before beginning to climb more slowly – today it’s $219 billion, about half its value at Welch’s retirement.

Back in 1982, the year after Jack Welch stepped up at GE, Johnson and Johnson underwent its own tribulations. That was the year the Tylenol killer laced product with cyanide in some Chicago area stores. James Burke, the company’s CEO, was so aggressive about recalling every bottle of Tylenol, nationwide, that the business press marveled that the CEO of a publicly traded company could afford to act on principle so rashly. Tylenol represented a huge fraction of the firm’s revenues, and in the short term, the company’s profits and market value tanked.

Martin argues Burke’s bold action reflected the company’s purpose statement, and that it helped build consumer confidence in the brand in the long term. In 2009, Johnson and Johnson’s market capitalization was more than twice GE’s, at $167 billion; today it’s $191 billion.

Friedman’s essay on the social responsibility of business argued that if managers lost their focus on the bottom line, investors and customers would rebel, they’d take their business to more successful rivals. Now, 40 years later, a growing movement of investors and consumers seem to be protesting that shareholder capitalists got their interests wrong.

In fact, socially responsible investment funds have been on the rise for 30 years. According to the US Social Investment Forum, a member association for investors, the socially responsible investment movement now represents $3,74 trillion, or 11% of US assets under management. That includes assets of individuals and institutions whose managers screen for corporate responsibility, or practice shareholder advocacy, or fund “community investing,” lending in communities under served by traditional financial services. And it represents a 486% increase from 1995, when the Forum started tracking; compared to a 376% increase in US assets overall.

Upwards of 68 million US consumers prefer to make their purchases based on a sense of social and environmental responsibility, according to one study, conducted by the National Marketing Institute in 2008.

Earlier this year, the Wall Street Journal polled its online readers to measure their interest in locally sourced food. Thirty percent of respondents said their interest in buying local was strong, regardless of cost or convenience. Only 7% said they had no interest in their food’s provenance; the rest reported mild to significant interest, depending on price and convenience. The results seem weightier, considering whose readership was polled.

Businesses with social goals have also proliferated. One recent paper tallied the membership lists of business associations with sustainable goals, such as the Social Venture Network, GreenAmerica and the Business Alliance for Local Living Economies, and counted 65,000 businesses with $40 billion in revenues. But the paper goes on to argue that that the law still tilts toward profit maximization, and that tilt still exerts a “chilling effect” on directors, and their counsel. The sustainable business movement has been pressing states to create alternative corporate forms.

[“The Need and Rationale for the Benefit Corporation,” principle authors: William Clark and Larry Vranka; January 2012]

Back in the 1980s, when corporate buyouts were being used for plunderous effect, many states passed “constituency statutes,” giving corporate directors explicit permission to consider interests other than obtaining the highest price for shareholders in evaluating an acquisition bid. Illinois allows directors to consider the effect of their actions on employees, suppliers and customers of the corporation, as well as the communities in which they are located. But the Clark-Vranka paper argues even those permissions are not completely reassuring. There is too little case law interpreting what weight directors may give other constituents, much less how they might apply in contexts aside from a takeover bid.

Since 2010, seven states have enabled businesses to incorporate as Benefit Corporations, or B-Corps, which are required by statute to create benefits for society as well as for shareholders. Illinois is not one of them, but we do have a statute enabling low profit limited liability companies, or L3Cs.

L3Cs are designed to facilitate investment in for-profit ventures with limited returns, partly by attracting investments from charitable foundations. The idea is that the foundation would take on most of the risk, and less of the return, in order to create more attractive opportunities for other investors.

Normally, foundations can be slammed with penalties for jeopardizing their capital with risky investments. But they are allowed to make what are known as Program Related Investments (PRIs), as disbursements in line with their charitable goals. L3C statutes are designed to create an entity that would automatically qualify for “program related” rather than “jeopardy” investments, though the Treasury has been coy about promising to recognize them as a class.

All these machinations may make you wonder if the principle of our capitalist system is really to ensure all participants the freedom to make decisions about their own best interests. If it is just to defend one interest, the chase for riches, above all others, then maybe we have made an idol of wealth.

Next Thursday, December 6th, IIRON will be returning to the Federal Building for a noon rally to attract Senator Durbin’s attention. They’ll be asking him to promise to preserve the safety net for the elderly, and health care for the poor. They’ll ask him to avoid the fiscal cliff by taxing the rich.

It would be a modest increase, the rich can afford it. In fact, it’s really a return to a tax rate they’ve paid before without ruining their status, or slowing a surge in the economy. Milton Friedman didn’t want business to pay for social goals. But he did make the case that the right way to pay for such things would be to convince our representatives in government to levy a tax.

Photo: Light on Life Images