The Purpose of Business? Whither Capitalism?
18th December 2017 at 11:41 am #1577Jim WrightModerator
In our Forum on 5th December we discussed a paper by Andrew Carnegie, “The Gospel of Wealth” in which Carnegie expressed his view that “the Law of Competition” required him to maximise profits and to run his business with maximum efficiency even though that meant that his employees suffered low wages and poor conditions of living and working. Having sold his business and become one of the richest people of his time, he then set about giving away his wealth, donating large sums to charitable purposes. Which raised the question for me as to what would have been the outcome if Carnegie had used some of that wealth while he was running his business to improve the living conditions of his workers. The question of the purpose of business and how much profit a business owner should make is as relevant today as it was in Carnegie’s times
In the early 2000s increasing numbers of people were questioning whether business, the financial sector and indeed the western economy was showing signs of losing its way – of losing sight of its purpose. Excessive salaries for senior managers; investor short-termism, private equity funds buying up companies, stripping out capital and putting them back on the market loaded with debt; mis-selling of financial products.
These were just some of the practices that were causing concern about the way capitalism was heading.
Since the early 1970s the established orthodoxy of economics, initially expressed by Milton Friedman and developed by the Chicago School of Economics, was that “the one and only social responsibility of business is to maximise the profits for shareholders.” But a contrary view, which could be summarised under the heading “impact investment” began to emerge in the early 2000s. Its essential postulate is that businesses and the financial sector needed to have a broader view than that expressed by Friedman and his supporters, namely, responsibility for employees and stakeholders, communities and the environment in addition to generation of healthy profits.
The financial crash of 2007/08 with its economic consequences for business, the economy and the ordinary man and woman in the street brought about a significant increase in the number of business leaders and investors who were exploring impact investment. Their view was that if we accept the broader definition of the responsibility of business, then instead of having a single bottom line to measure profit, there would be a fourfold bottom line that measured impact or success in terms of:
• Financial profit
• Impact on individuals and communities in terms of how they thrived and prospered as a result of the activities of the company
• Sustaining the environment in terms of the resources used from it and responsible management of the waste products produced by their business.
Although impact investment has demonstrated that the approach generates a healthy return for all four areas of impact (e.g. Wikipedia, Environmental, Social and Corporate Governance; SABMiller Sustainable Development Report 2016), business and investment practices changed little following the financial crash.
Consequently, more and more business leaders, economists and political commentators are expressing concern that capitalism has lost its way. (E.g. Financial Times 22October 2017, “Top UK business Leaders Decry Current State of Capitalism”)
What options are there for a different future?
• Abandon capitalism? If so where is the alternative?
• Move towards a more socially responsible capitalism?
o Corporate social responsibility, while commendable, is in reality, in many instances, not much more than a sticking plaster to salve the consciences of managers and share-holders
• Increased political intervention and regulation?
o The track record for politicians in solving problems of business and finance is not strong
In their recently-published book entitled “Completing Capitalism; Heal Business to Heal the World”, Bruno Roche and Jay Jakub describe a long-term project within Mars Inc. which addresses these issues. It is a quantum leap forward from the impact investment approach. Rather than measuring impact in the areas of the four-fold bottom line (downstream) they have investigated the outcomes from regarding the four areas as different forms of capital (upstream) for investment; and then maximising the return on investment in human, social, natural and financial capital. In their initial projects they have demonstrated that this approach can increase return on financial capital as well as the other areas. They aim to develop a model that other large businesses can adopt.
I suggest this is an approach that thinking, socially responsible, capitalists could find interesting and instructive.18th December 2017 at 7:13 pm #1578Prabhu GuptaraParticipant
I like the Roche and Jay book too.
However, there are of course now several approaches of related sorts, ranging from the UN Global Compact to the DJSE and FTSE4Good, and from the B-Company through Integrated Reporting to the Relational Proximity Framework.
All utopias are dangerous – partly because it is not totally clear whether any utopia will be that utopian for everyone after all, but primarily because the path to each utopia is uncharted.
For example, as you indicate, there is the utopia of capitalism towards which we seemed to have been headed between roughly 1980 and 2007. Once that came a cropper, we have been marching, slowly for a time, and now rapidly under Trump, in a rather different direction.
There is the utopia of Marxism or socialism. No doubt it would be excellent if we could arrive there. But there are the routes that have been tried by Russia, and there are the routes that have been tried by China, and then there is the route which has been tried by Vietnam, and there is even the route which has been tried by Cuba, and there is finally the route which is being tried by North Korea. Pardon me if I upset you by saying the following, but I don’t see that any of those routes have brought those countries any closer to the Marxist utopia either.
Meanwhile, millions of lives have been sacrificed during the marches towards these utopias, resulting in what have been the bloodiest 150 years in human history.
Perhaps that is why the greatest rage today are the utopias vouchsafed to us by technology – for example, Singularity. However, it is startlingly unclear how any transition from the current system to any such “techutopian” future might be possible, given that the way to that utopia is breached because of the massive unemployment that will be the inevitable result in the journey from our current arrangements to “techutopia”. The figures for tech-unemployment have now been investigated by a huge amount of research.
Naturally, the breach could be repaired by some sort of universal basic income and other possible solutions. However, none of those seem to have the needed support – at least, not yet.
In other words, the world doesn’t lack ideas and systems that would make the future more balanced, realistic, sustainable and humane.
Rather, it is what you call “thinking, socially responsible, capitalists” that the world lacks.
That is why the vision and mission of organisations such as the Renaissance Forum, which don’t simply “preach to the choir”, are so important.
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