This is what we know to be true: business is good because it creates value, it is ethical because it is based on voluntary exchange, it is noble because it can elevate our existence, and it is heroic because it lifts people out of poverty and creates prosperity. Free-enterprise capitalism is one of the most powerful ideas we humans have ever had. But we can aspire to even more. Let us not be afraid to climb higher.
John Mackey, Founder of Whole Foods in his book Conscious Capitalism
A lot of my friends, and even family, think I have become a liberal in my later years. In fact, I don’t think I have changed, I am still one of the most entrepreneurial and pro business people I know, and I’ve recently found enough information to verify a feeling I’ve had for the last five years. Dear Capitalism, its not me, its you. You are not the same system you used to be. You have gone from a system that efficiently provides capital to business and encourages growth and competition to a system that rewards cost cutting, short term profits, and robber baron CEO’s. And the world is beginning to figure out that you have hurt a lot of people while you have become a reverse Robin Hood, driving a wedge between the rich and poor; you have all but stopped elevating society in favor of elevating stock traders and financial experts. You have forced generations into mountains of debt, forced the devaluation of valuable companies, and fostered sweat shops all over the world in the name of “shareholder value.”
Capitalism needs an intervention and yesterday, Pope Francis became the latest counselor, in an apostolic exhortation that is sure to have the Rush Limbaugh’s of the world screaming about “confiscation of wealth,” and “socialism.” The Pope offered a compassionate plea for Capitalism to get back to serving society instead of the other way around. That’s what Popes do. Let’s listen to what he said:
“As long as the problems of the poor are not radically resolved by rejecting the absolute autonomy of markets and financial speculation and by attacking the structural causes of inequality, no solution will be found for the world’s problems or, for that matter, to any problems.”
In my lifetime, and I’ve owned a mutual fund since my Dad invested my paper route money when I was 10 years old, I have watched capitalism and corporate finance change from a valuable meeting place of business people needing capital and investors willing to supply it to a casino focused only on short term profits and unfettered speculation. It began in Chicago, with the words of Milton Friedman in his 1970 essay “The Social Responsibility of Business Is to Increase Its Profits”:
“There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
Friedman and his cronies at the University of Chicago espoused the “Efficient Market Theory” which, in short, stated that the only thing that a company’s management need focus on was profits, that markets were efficient and that all would be well if a company was profitable for its shareholders. They won a Nobel Prize for their work and the game was changed. The efficient market theory said that all news about a company was reflected in its share price and companies hired management whose pay was based on the price of the company stock. Robert Goizueta of Cocal Cola became the first CEO to become a billionaire without founding the company, Michael Eisner of Disney followed shortly thereafter. The new capitalism focused on the day to day actions of the stock market and the belief that all news was in the market.
Only, it turns out that markets are not efficient and some of America’s best and brightest flocked to Wall Street to gin up the game (see Enron), to take advantage of a not so efficient market. Research and Design budgets were slashed, workers laid off, and companies bought out and merged all in the name of shareholder value and quick profits. Established, well known companies like Hewlett Packard and General Motors became shells of their former selves in the name of share price. Financial companies, who should have known better, like Countrywide Mortgage, Bear Sterns, and Fannie Mae died as their robber baron managers and shareholders kneeled at the altar of quick profits.
Even today, investors like us are paying for their sins as the Federal Reserve is forced to keep interest rates artificially low to pay for the bailouts and destruction ravaged by the unfettered speculation that Capitalism became. Retired investors are faced with the choice of bearing the risk associated with owning stocks and bonds or earning virtually no interest in safer, guaranteed investments. Corporate America has tried to grow by cutting costs and viewing the short term: and instead of becoming “too big to fail” they have become too big to grow.
“The Importance of Start-ups in Job Creation and Job Destruction” showed that between 1977 and 2005 (before the Great Recession and the soaring unemployment rate), existing firms were net job destroyers, losing 1 million jobs net combined every year. In contrast, new firms added an average of 3 million jobs annually.”Bruce Nussbaum Creative Intelligence.
In other words, the hope for our economy lies in the entrepreneur, the creative businessman (or woman), who is the hero of our story. New jobs, new products, and new hope come from the person who is focused on providing value, on building something for the long run, and in bringing his “stakeholders” with him. Stakeholders may include the shareholders of a business, but they also include a firm’s customers, their suppliers, their employees, and their community. Businesses that focus on stakeholders are the opposite of Wal-Mart, a company who embodies everything that is wrong with business: they squeeze their suppliers mercilessly, treat their employees like serfs, and brag about having the lowest prices in town while putting every small business they possible can, in that town, out of business.
We celebrate the entrepreneur because we value the entrepreneur’s creativity. It is that creativity that we need to make central to our economy and to our economic thinking. The data clearly show that the efficient market theory has fostered an economic system that, over the past two decades, has generated little innovation among most companies, weakened the middle class, widened inequality, and led to the relative decline of the United States. Nussbaum, Bruce
The new model of capitalism might just look like this, a model that focuses on a company’s role in its community and its responsibility to more than just its share holders. Whole Foods, The Container Store and other corporate partners lead the membership of a growing community known as Conscious Capitalism, from whom I borrowed this illustration. You can join too, I have.
Look, I think it makes sense as consumers and investors to look towards companies that have a long term view and are more enlightened than those who are only managed with an eye towards the latest Wall Street arbitrage. I believe that a company managed with a broader view is probably a better organization overall and might just win the profit race in the long run.
As for me, I am on the side of the creative person who builds something. My definition of creativity, stolen from educator and author Sir Kenneth Robinson, is “Creativity is applied imagination” and I strongly believe that Capitalism is going to have to get back to its roots and original purpose, to help business owners find and create value to solve problems, make our lives better, and lift as many of us as it can along the way.
Businesspeople have allowed the ethical basis of free-enterprise capitalism to be hijacked intellectually by economists and critics who have foisted on it a narrow, self-serving, and inaccurate identity devoid of its inherent ethical justification. Capitalism needs both a new narrative and a new ethical foundation.