Friday, April 22, 2011

A Digression on Capitalism and Capitalists - When is enough enough?

My buddy Heather (aka @ari_WISCslob, you must follow her immediately!!!) asked me the other day (via Twitter)
It's a really good question and I think that people who don't work in business wonder when enough growth is enough?  The simple answer is never.  Basic market forces demand at least some measure of growth in a company.  There will never be enough growth until the entire world is consumed in one form or another.

This posting is not intended to be a complete primer on business or business cycles, but more of a broad brush of the motivations companies have to grow their business and the social implications of that growth.  Besides, I'm not qualified to pontificate on microeconomics (or macroeconomics for that matter, but that doesn't stop me!)

Educating Capitalists
Business school's teach students  "If your business doesn't grow, it dies."  Quite the appropriate metaphor for the core of the capitalist system, don't you think?.  Like the shark that must swim continuously, eat, shit and make baby sharks, business must move continuously forward, consuming, producing, consuming, producing, or it too will die.

Companies exist for one, single, solitary, fundamental reason: to grow capital.  The shark exists for one, single, solitary, fundamental reason as well: to make baby sharks.

The basic motivation for business growth, then, is to return profits to investors, be they internal investors (owners, employees, family, friends, etc.) or external investors (shareholders, venture capitalists, angel funders, etc.).  Growth provides a stream of increasing return on investments which is why, in the capitalist system, people invest in companies.  Success is measured by the size of your wallet rather than the content of your character (to paraphrase Martin Sheen from Wall Street) It is in the hope that they will "prosper" and continue to increase their payouts to investors.

Modern capitalism is principally about consumer consumption and finance.  While the right-wing economists perpetuate their mendacious "supply-side" economic model, they know full well that without consumers, the system will collapse.  The whole concept of "Going Galt" is a conceit propped up by the fear that, one day, people will realize that they don't own things, rather, the things own them.  But I digress.

The (a)morality of Capital
Companies, and capitalism in general, are amoral.  They intrinsically exhibit neither morality nor immorality, they simply exist within the moral framework of the human interactions they support.  I've heard lots of arguments on Twitter that "capitalism is evil."  Capitalism is no more evil than a shark.  A shark does what it does because it's a shark not because it's driven to eat Roy Scheider out of malice.  Nothing more.

Capitalism itself isn't evil, but many Capitalists are.

Moral and Immoral Capitalists
Some companies are very moral and, within the constraints of the capitalist system, try to do good by their employees, investors and society.  Ben & Jerry's Ice Cream comes to mind as a company that people love to work for and buy from because of their ability to "humanize" capitalism.  Make no mistake, they're in it for the money in one way or another, but they temper their acquisitive nature with "payback" to their employees and their community.

The most egregious failure of capitalism in recent memory would probably have to be George W. Bush's friends at Enron.  Here was a company that went completely off the moral rails, with employees joking about how they're going to jack up grandma's energy costs just for fun.  These guys were the epitome of absolute power corrupting absolutely.  The system failed these guys in a big way because they were able to get away with what they did.  This was the result, clearly, of a deregulation agenda gone horribly awry.  But then many deregulation agendas go horribly awry.

Controlling the Invisible Hand of the Market
What is that system? What controls do we have in place to prevent being bitch-slapped by the Invisible Hand of the Market?  Why, it's the government, of course!  Caveat emptor works great when you're conducting transactions in a village market, but it doesn't work so well with things like electricity, healthcare or oil.  People rely on the government to ensure things like food and drugs are safe, planes take off and land safely, roads are built and maintained, basic infrastructure services are provided.  The government is good at these things.

Sustainable Capitalism
In the last few years, Al Gore and others have begun to call for a form of capitalism they call "sustainable capitalism.  One excellent source of information on this new idea is this paper from David Blood, a Senior Partner at Generation Investment Management.  He writes
The global financial crisis had its origins in short-term, unsustainable strategies and actions. Before the crisis and since, we (and others) have called for a more long-term and responsible form of capitalism – what we call “Sustainable Capitalism”. Sustainable Capitalism seeks to maximize long-term economic value creation. It explicitly integrates environmental, social and governance (“ESG”) factors into strategy, and into measuring outputs and assessing risk and opportunities. Sustainable Capitalism challenges us to generate financial return in a long-term and responsible manner.
Speaking of Growth
So getting back to Heather's original question, why endless growth, here's my take on it.

  1. Business students are taught that if you're not growing, you're dying
  2. Growth, as a fundamental function of capital, is neither moral nor immoral
  3. Investors demand ever-increasing rates of return on investment or they will take their money elsewhere
  4. Competition for investment dollars ensures that the system self-perpetuates (and, by the way, generates innovation and inspiration along the way)
  5. Companies govern how they choose to manage growth within the moral strictures of the society
  6. Government's role is vital to ensure that the system operates smoothly and efficiently without fraud and other shenanigans and to enforce the moral framework deemed appropriate by society
  7. Government also provides, within the regulatory framework, safety checks on the products of capitalism thereby limiting the "caveat emptor" nature of the system.
  8. Industry has demonstrated their inability, in many cases, to self-regulate
  9. "Enough" is never defined in the system, we play until the game is over (i.e. when we run out of our ability to exploit people, energy, the Earth, the game is over) though some recognize the need to define a sustainable capitalism that is not "all consuming."
Heather, I hope that I've answered your question!

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