Critics often contend that capitalism will never be able to reconcile the public good with the self-interest of the firm. But this author clearly and persuasively argues that it is possible and desirable to be concerned about the public welfare and pursue profitability. Such a form of capitalism can be a moral one, less deserving of criticism on the grounds of social justice.
Stephen B. Young is the Global Executive Director, The Caux Round Table, an international network of business leaders working to promote moral capitalism. He is the author of Moral Capitalism: Reconciling Private Interests with the Public Good.
Business decision-making is driven, rightfully, by valuation analysis. The prices of inputs, the return on capital, the value of a product or service in the minds of consumers and customers, calculations of gross and net profit margins, and similar financial considerations provide a workable intellectual framework for market capitalism. Using such data permits sound decisions to be made for at least short-term success.
But a question has been asked of capitalist decision-making almost since Adam Smith's treatise, An Inquiry into the Origins and Causes of the Wealth of Nations, came off the press in 1776: Are such micro-economic calculations of intersecting supply and demand curves sufficient for the sustainable success of the free-market individualism? Some in the tradition of Karl Marx look to the advantages that capital has over labour to argue that free markets lead to unjust outcomes in the short run and to the collapse of demand in the long run. Others object to the self-seeking motivations that seek one-sided outcomes from market dynamics. Still others point to the externalities - the costs to others, such as communities and the environment - that are not included in the prices used by business to calculate their profits as grounds for regulating private business while enhancing public interests.
The argument is therefore made that capitalist calculations of value may work well for the owners of capital, but, to the contrary, do not embrace a more encompassing range of values that are needed for sustainable social justice. Private business is placed by these critics in permanent and contumacious opposition to the public good.
This opposition to capitalism would naturally evaporate if it could be demonstrated that business decision-making, though driven by self-interest, did, in fact, embrace vital externalities of consequence to the public interest.
Those, like me, who believe that free market capitalism should be the economic system of choice are searching for a Holy Grail of analysis, one that would resolve the contradictions between capitalist valuation techniques and other ethical and moral frameworks of concern.
The end of inquiry should be an integration of virtue and self-interest. Self-interest emphasizes the internal rationality of capitalist calculations, while virtue brings into consideration needs and concerns external to the intersection of supply and demand curves. Such a Holy Grail of valuation is a theory of the firm that aligns stakeholder concerns with the strategic needs of owners of capital.
Why seek the Holy Grail of valuation The importance of finding such a Holy Grail of valuation is twofold. First, at the level of politics and struggles over social justice and economic regulation, the Holy Grail would tilt the argument in favor of private-sector autonomy and the freedoms of capital accumulation. Second, at the level of the firm, the Holy Grail would guide management towards sustainable profitability.
Let us consider the application of a more strategic understanding of business success to business decision-making. In his books Built to Last and From Good To Great, Jim Collins demonstrates that certain approaches to business lead to greater sustained success than others. In particular, he suggests that using a "both/and" analytical capability rather than an "either/or" mindset maximizes returns, and so the capitalized value, of the company. The same approach produces higher quality returns that have greater certainty and less risk volatility.
The "both/and" analytical capability implies the possibility of integrating virtue and self-interest within the world of business rationality. Should returns increase in quality - lowering expected risk - then the wealth creation of business can be maximized. High risk correlates with expected high returns but not necessarily with maximum value. In a high-risk environment, risks may be expected to materialize and destroy yields. Stability and certainty of returns seem more likely to induce investment and growth of enterprise than the converse possibilities.
In addition, the integration of internal factors into the cost and capitalization equations would forestall "surprises" - social and political events arising in political and social arenas that have an unexpected and negative - impact on the firm's profitability. We have recently seen the workings of such externalities in the cases of Enron, Tyco and WorldCom. The manipulation of financial reporting at Enron was an unexpected development external to the risk/return calculations of participants in the market for Enron stock.
Adverse consumer reactions to Shell's practices in Nigeria or Nike's use of Korean sub-contractors in Vietnam were also negative factors impinging on the internal expectations of profit of those companies. Both Shell and Nike had to respond with new and more costly ways of doing business in order to sustain customer good will.
