Capitalism is dead. Long live capitalism. | Opensource.com

Capitalism is dead. Long live capitalism.

Posted 29 Apr 2011 by 

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I’m a capitalist by conviction and profession. I believe the best economic system is one that rewards entrepreneurship and risk-taking, maximizes customer choice, uses markets to allocate scarce resources, and minimizes the regulatory burden on business. If there’s a better recipe for creating prosperity I haven’t seen it.

This article was originally posted on the Management Innovation eXchange (MIX), an open innovation project aimed at reinventing management for the 21st century.

So why do fewer than four out of ten consumers in the developed world believe that large corporations make a “somewhat” or “generally” positive contribution to society? (This according to a 2007 study by McKinsey & Company.) Why is it that only 19% of Americans tell pollsters they have “quite a lot” or a “great deal” of confidence in big business? (In the 2010 Gallup survey, only Congress scored worse.) It seems that a majority of us expect big companies to behave badly—to ravish the environment, exploit employees, and mislead customers. When it comes to feckless irresponsibility, big business seems to be in the same league as Tiger Woods and Lindsay Lohan.

Some blame Wall Street for this state of affairs. In March 2009, the Financial Times claimed that the “credit crisis had destroyed faith in the free market ideology that has dominated Western thinking for a decade.” Around the world, hyperventilating pundits and grandstanding politicians argued that a new model of capitalism was needed—one that would make executives even more accountable to legislators and bureaucrats. Statists spied in the calamity a once-in-a-lifetime opportunity to enlarge their regulatory fiefdoms—and moved swiftly to do so.

While one should never underestimate the ability of risk-besotted financiers to wreak havoc, the real threat to capitalism isn’t unfettered financial cunning. It is, instead, the unwillingness of executives to confront the changing expectations of their stakeholders. In recent years, consumers and citizens have become increasingly disgruntled with the implicit contract that governs the rights and obligations of society’s most powerful economic actors—large corporations. To many, the bargain seems one-sided—it’s worked well for CEOs and shareholders, but not so well for everyone else.

You don’t have to read Adbusters to wonder whose interests big business really serves. When it comes to “free markets,” there’s plenty to be cynical about.

If individuals around the world have lost faith in business, it’s because business has, in many ways, abused that faith. In this sense, the threat to capitalism is both more prosaic and more profound than that posed by marauding bankers—more prosaic in that the danger comes not from the esoteric schemes of “rocket scientists” but from the slowly accreting frustrations and anxieties of “ordinary” folks; and more profound in that the problem is truly existential—it threatens to burden every large company with the sort of regulatory constraints that were once reserved for nuclear power plants. No amount of cuddly, “here’s how much we care” PR is going to avert this danger.

Some may bemoan the fact that capitalism (broadly defined) has no credible challengers, but it doesn’t. Like democracy, it’s the worst sort of system except for all the others—and that’s why each of us has a stake in making it better. If we fail to do so, the growing discontent with business will embolden all those who believe CEOs should answer first and last to civil servants—to those who are eager to replace invisible hand of the market with the iron hand of the state.

This is not an outcome most of us would welcome. While cinching the regulatory straitjacket even tighter would protect us from capitalism’s worst excesses, it would also rob us of its bounties. So we must hope that executives will face up to the fact that an irreversible revolution in expectations has occurred.

Millions of consumers and citizens are already convinced of a fact that many corporate chieftains are still reluctant to admit: the legacy model of economic production that has driven the “modern” economy over the last hundred years is on its last legs. Like a piece of clapped out engine, it’s held together with bailing wire and duct tape, frequently breaks down, and befouls the air with noxious fumes.

While we’re grateful that someone invented this clattering, savage machine a century and more ago, we’ll also be happy when it’s finally carted off to the scrap yard and replaced with something a bit less menacing.

We know the future cannot be an extrapolation of the past. As the great grandchildren of the industrial revolution, we have learned, at last, that the heedless pursuit of more is unsustainable and, ultimately, unfulfilling. Our planet, our security, our sense of equanimity, and our very souls demand something better, something different.

So we long for a kinder, gentler sort of capitalism—one that views us as more than mere “consumers,” one that understands the difference between maximizing consumption and maximizing happiness, one that doesn’t sacrifice the future for the present, and regards our planet as sacred.

So what stands in the way of creating a conscientious, accountable, and sustainable sort of capitalism—a system that in the long-term is actually habitable?

It is, I think, a matrix of deeply held beliefs about what business is for, whose interests it serves and how it creates value. Many of these beliefs are near canonical (at least among CEOs of a particular generation or ideological bent). They are also narcissistic and archaic. Among the most toxic . . .

  1. The paramount objective of a business is to make money (rather than to enhance human well-being in economically efficient ways).
  2. Corporate leaders can only be held accountable for the immediate effects of their actions (and not for the second and third order consequences of their single-minded pursuit of growth and profitability).
  3. Executives should be evaluated and compensated on the basis of short-term earnings (rather than on the basis of long-term value creation, both financial and social).
  4. The way to establish a business’ social credentials is through high-minded mission statements, green-tinged products, and a fat CSR budget (rather than through an unshakeable and sacrificial commitment to doing the right thing).
  5. The primary justification for “doing good” is that it helps a company to “do well.” (The implication: a company should do good when there’s an upside and something less when there’s not).
  6. Customers care a lot more about value for money than they do about the values that were honored (or defiled) in the making and selling of a product.
  7. A firm’s “customers” are the folks who buy its services (rather than all those whose lives are impacted by its actions).
  8. It’s legitimate for a company to make money by exploiting customer ignorance, exaggerating product benefits, and constraining customer choice.
  9. Market power and political leverage are acceptable ways of countering a disruptive technology or thwarting an unconventional competitor.
  10. Business is about advantage, focus, differentiation, superiority, and excellence (and not about love, joy, honor, beauty, and justice).

Perhaps these self-serving convictions were less objectionable 57 years ago when General Motors’ then–chairman, Charles Wilson, proclaimed that “what is good for GM is good for America.” But today, they are discordant and dangerous. It is no good pretending that perceptions haven’t changed or that capitalism’s critics are simply misguided. There is a growing consensus that rampant consumerism debases human values; that pell-mell growth imperils the planet; that unchecked corporate power subverts democracy; and that myopic, profit-besotted CEOs are as likely to destroy value as create it.

I am an ardent supporter of capitalism—but I also understand that while individuals have inalienable, God-given rights, corporations do not. Society can demand of corporations what it likes. That’s why self-serving beliefs are also, ultimately, self-limiting.

Of course, as consumers and citizens, we must be acknowledge that companies can’t remedy every social ill or deliver every social benefit. We must also face up to our own schizophrenia. We can’t expect companies to behave responsibly if we blithely abandon our own principles to save a buck.

As for executives: if you feel your industry is still too lightly regulated, if you secretly long for the regulatory fetters to be tightened even further, if you think that Sarbanes-Oxley, the Patient Protection and Affordable Care Act, the Restoring American Financial Stability Act, and Basel III don’t go far enough—then just keep on doing what you’re doing. If, on the other hand, you’ve had enough of sanctimonious politicians and meddling bureaucrats, then you must face up to a simple fact: In the years to come, a company will be able to preserve its freedoms only if it embraces a new and more enlightened view of its responsibilities. Many CEOs have already resigned themselves to this new reality, and a handful have eagerly welcomed it. There are others, though, who still cling to the belief that a company is first and foremost an economic entity rather than a social one. Sooner or later, these holdouts will discover that they face the same hard choice that confronts every teenager—drive responsibly or lose your license. For the sake of capitalism, let’s hope it’s sooner.

So then, dear reader, two questions: Are there other beliefs you belief represent a threat to capitalism? And more generally, what do you think needs to be done to rehabilitate capitalism’s tarnished reputation?

And finally, a really important recommendation. If you’re eager to dig deeper into these issues, pre-order Umair Haque’s new book, “The New Capitalist Manifesto: Building a Disruptively Better Business,” to which I wrote a short foreword. Umair, who writes with uncommon wit and passion, draws a host of essential lessons from companies that have already embraced the challenge of reinventing capitalism. The New Capitalist Manifesto was launched in January, and I expect it to become one of the most talked about books of 2011.

This post was originally published on Gary's Wall St. Journal blog.

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9 Comments

anon

TL;DR

Heres my view anyway:

Taking control of everything is just wrong. Look at companies like oracle for example, need i say more?

Ok i will, Oracle is nothing but a greedy pig. They stop innovation and smaller companies from creating anything.

The same goes to all other patent trolls. Its quite obvious patent trolls are capitalists. Its the same thing with supermarket outlets... look at tesco as an example. When a store can afford to buy out every single "space" to put up a new shop, its stops all of the local outlets from being able to do business.

When "everything" is controlled by a corporation, life cannot work. Capitalism in itself is almost like a dictatorship for the fact they try to control everything by stopping others from succeeding.

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Jonn Izzik

How come Capitalism needs social-assistance to survive (on bail-outs) -- and, those who need social assistance must line up to mission food-banks and need sleeping under bridges. Capitalism turns blind eyes to the problems they created on their paths for maximizing profits not to be shared. You have spit the working class in the face. I wonder would YOU prefer to feed the poor and un-employed to a gas-chamber -- or not? PLease provide a reply -- loud and clear-- honest to: por favor.

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bug

In theory capitalism makes society more efficient.

Crudely put, efficiency is worked out by weighing resources produced against resources consumed.

Problem is accounting can only measure what is real, it doesnt measure human values like security and happiness, they get ignored and neglected even though they are fundamental to the efficiency of a business. (happy works are better works, insecure workers are distracted works)

Capitalism is great for producing lots of stuff, but its not going to make society more humane, or moral.

Perhaps capitalism cant be improved, but we can improve society by recognizing its limits, and not pretending its the cure for all ills.

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William

Capitalism is dead? I must have missed that. No, many of the criminals on Wall Street who brought the world economy to it's knees have made out like the bandits they are. Their financial power is more concentrated than ever. For capitalists it's business as usual - full steam ahead!

Yes, there is something better than competition - it's called cooperation. Human creativity is enhanced where ideas are freely shared. That's one of the things open source has taught me.

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MarcoP

Hallelujah, amen.

The belief that I feel has permanently tainted capitalism is the confluence of the ideal of free market capitalism and the current implementation of corporate capitalism. If a truly free market were put forward, replete with low barriers to entry could operate in a laissez-faire manner where the government is a recourse for protection from fraudulent behaviors are too dangerous to allow to self correct, it would be called socialism by the current crop of corporate plutocrats.

In order to resurrect capitalism, we need to break down all of the legal fictions that coddle the corporations: the fallacy of corporate personhood, coercive monopolies and government fiscal support masquerading as tax breaks and tarriff protection, patent protections, superpac and lobbying capacities. Then you can start to remove the corporate stains, but it would probably be better to coin a new phrase. Reinvention seems to be the new trend for corporations and their new corporate social responsibility movements; take a page from their playbook.

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Bob

which is why it's dying so fast.

1. capitalism is a tool to make money. if you are depending on a corporation to be moral it's only measure of morality is it's profitability. to think otherwise is delusional. that is why regulation is critical and should have the power to enforce and police whom they are regulating. Good regulation does not limit growth of the operation of business any more than a good referee limits the points scored in a game. You state that a corporation is not a person and does not have the same rights, yet you anthropomorphize it as if has a soul. Stop doing that.

2. The free market only works when one of, if not the first, choice is "no" or "none of the above". if cannot say no then you don't really have a choice now do you? That means that there needs to be controls at those points where "no" is not an option because it is there when the abuse happens. not just that but a "contientious" company who does not take an advantage of people at such points are at a fiscal disadvantage to companies that do.

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Scott Dunn

The assumption is that we are operating in a capitalistic system. A sign that we are not is that we issue and protect "patents". Patents are hailed as a sign of capitalism, but the way they are used is more for expropriation of property and markets.

Another sign that we are not operating under a capitalist system is by removing responsibility from corporations by treating them as persons, but granting them privileges that no mere person could ever hope to get. Perpetuity, limited liability, multiple personalities as evidenced by membership in multiple boards of directors, and the right to buy other corporations (slavery) - all of these are signs that the puppet masters are contemplating something other than capitalism.

When ignorance of the customer is a supporting leg of a business model, it isn't capitalism. When tax breaks that would *never* be given to ordinary people are then given to corporations, that isn't capitalism.

I agree with your post, Gary. But the model of capitalism I had in mind is that in which everyone is responsible for their actions and that the goal is to create wealth, not extract it from someone else. Until we embrace that philosophy, we can only expect more regulation.

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Juri

The biggest obstacle when discussing these issues usually is the one of defining what we are talking about - in short, what is capitalism? Is it merely a system "that rewards entrepreneurship and risk-taking, maximizes customer choice, uses markets to allocate scarce resources, and minimizes the regulatory burden on business."?
I don't think so. The most characteristic thing about capitalism is how it values labor, some of us buy labor from others and some of us sell it. If you don't have a good definition of labor and how you want labor to function there's no point trying to define a more gentle (capitalist) system.

On rewarding entrepreneurship and risk-taking: why is this important? Is'nt it more important to reward inventiveness? The classical definition of entrepreneurship doesn't involve inventing the actual product or service, only to market and sell it which is exactly what capitalism rewards and nothing else.

Isaac Newton said: "If I have seen further it is only by standing on the shoulders of giants". Isn't this exactly what we, the open source movement, make visible by collaborating on a totally free market where no one have more power (at least in theory) than anyone else? No one buys labor from anyone else because no one make any money from it (in theory), but everyone collaborates. And isn't this what we in the open source movement should promote instead of "a more gentle capitalism" - a collaboration between everyone participating in society?

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Scott Dunn

There is significant evidence in support of encouragement for collaboration. I'd like to point out a pretty interesting movie, "I am" (iamthedoc.com). The movie demonstrates very well the power of cooperation (or collaboration, if you will), over the power of competition.

That is the success of open source software and at one time, it was the success of capitalism, too. Cooperation gets second billing in the discussion of capitalism, but open source software has helped to change that. I hope the trend continues.

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Gary Hamel is a leading expert on management, recently ranked by The Wall Street Journal as the world's most influential business thinker. Hamel's landmark books, Leading the Revolution and Competing for the Future, have appeared on every management bestseller list and have been translated into more than 20 languages. His latest book, The Future of Management, was published by the Harvard Business School Press in October 2007 and was selected by Amazon.com as the best business book of the

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