In Defense of Capitalism

I saw John Mackey of Whole Foods speak at inc. Magazine’s GrowCo conference (highly recommended), and have read his book Conscious Capitalism since. In both, he began with the premise that capitalism is viewed negatively in the U.S., that companies are viewed as greedy and are a cause of social problems. He continues with a defense that shows that capitalism has raised the standard of living, increased life expectancy, and generally improved people’s lives. Please read the book for the details. I agree with all of this, which is not difficult as it is fact based.

He then proposes that capitalism must evolve from its current form into what he calls conscious capitalism, with one of the base tenets being that a company must have a purpose greater than making money. When I was in business school some 20 years ago, I heard this same theory, only it was called business ethics at the time. I had a problem with it then, and I still do today. I believe a company’s primary purpose and responsibility is to increase its shareholder’s value. As Milton Friedman stated, “The Social Responsibility of Business is to Increase its Profits”. If a company is not increasing in value, it will cease to exist (or at least should). Mr. Mackey certainly understands that profits are necessary and desirable, but he still thinks companies need to go further and have something “greater” as their primary purpose. I think this reverses the order of priorities.

The idea that a company that focuses on making money is inherently bad, or at least less good I believe is fallacy. Often in describing ethical or socially responsible companies, it is cited that they do well by doing good, as if doing good alone was the secret to taking care of their shareholder’s investments. I would argue that a well-managed company will do socially responsible things not because of some higher calling, but because it is good business. I would also argue that companies that are bad citizens will do poorly in the long run. The most current narrative of evil, greedy companies is investment banking, which caused a financial crisis through their greed. Yes, those companies behaved very poorly, and if there was not a government intervention, they would have failed, and would no longer exist in that form. The huge bonuses would not have been paid, billions of taxpayer dollars would have not been used to prop them up, and hopefully a lesson in how to behave responsibly would have been learned. That would have been a fine example of how capitalism enforces good behavior, but it was lost in the non-capitalistic idea of too big to fail. Oh, and the financial crisis would never have happened without a bunch of bad loans being made. Look for the root cause of those. Did banks intentionally make bad loans, or was there some other encouragement or reason for making loans without down payments to under qualified buyers? Was it capitalism?

If having a greater purpose was truly what was needed for companies to succeed, we would need a lot fewer charities. After all, a grocery chain could have the purpose of feeding the world, and to that end, lower prices and improve distribution to such an extent that no one would ever go hungry. Of course, they would also likely go bankrupt.

I believe the great companies try very hard to make money, but not in a short-term, quarter by quarter results way, and not by attempting to squeeze every penny from customers, employees and suppliers. No, great companies focus on making money by providing great products and services to their customers, by putting their employees in position to be productive and effective, and by creating mutually beneficial relationships with their suppliers. These are the things that make companies great for the long-term. These are also the things that a conscious company does, according to Mr. Mackey. Sure, you can maximize short-term profits by cheapening your product, or cutting employees, or arm twisting suppliers, but in the end those three groups will leave you for greener pastures. A company can be a bad member of the community, pollute the environment, work shaky tax incentive deals, and treat their employees poorly, and they may reap some short-term benefit. In the end, it will cost them.

When I was in graduate school, I worked for United Technologies (UTC). GE was UTCs major competitor in several markets, and was at the beginning of the Jack Welch era. UTC was struggling a bit, and not behaving particularly well, while GE was doing fairly well financially. In business ethics, GE was held up as an example of a fine corporate citizen, while UTC was held in disdain. I had lived in Connecticut most of my life, however, and grew up near the GE headquarters. I remembered when GE wasn’t doing so well, and how socially responsible they were at the time. In actuality, they behaved pretty much like UTC. I mention this because Mr. Mackey cites Jack Welch’s GE a few times as an example of a bad actor. My professors might not have known, but the people who had lived in the community did.

It is disturbing to me that even a capitalist such as Mr. Mackey can show how capitalism and businesses have benefited mankind, yet he still feels the need to change them for some concept of societal good, in effect ratifying critics’ charges that capitalism in its current form is broken. I think we need more business leaders to stand up to defend capitalism, and say we do provide benefits to society. We provide jobs for people. We provide products that make people’s lives better. We provide tax dollars to all levels of government. We increase our investor’s value, which includes retirees, pension funds, and municipal investments. We should never apologize for increasing our shareholders wealth, because that is what we are supposed to do. Yes, they are some that companies that behave poorly. Please let them fail, and please let the good ones thrive.

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