‘Stakeholder capitalism’ isn’t capitalism

Richard Lorenc Cofounder, Liberty Markets LLC
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Last week at Salon.com, Michael Lind of the New America Foundation declared the failure of “shareholder capitalism,” Mr. Lind’s unique way of describing an economic system in which the production of goods and services is owned and directed by private interests.

In other words, plain, simple capitalism.

Upon pronouncing the failure of the capitalist type of capitalism, Mr. Lind proposes that Americans consider an economic doctrine he calls “stakeholder capitalism,” in which, apparently, businesses would be unburdened from having to seek profit and liberated to pursue the common good.

“Stakeholder capitalism” is not a new idea. It could just as easily be called socialism. Both notions propose an economic and legal system where a company is accountable to a large community beyond those who bore the costs of developing the business.

But, as always, these ideas run up against serious questions of execution. How would companies be certain they are pursuing the right social goals? How can a community motivated by a specific view of the common good know whether its business is actually producing value? How would this sort of company make sure it’s not wasting resources that could be used more productively elsewhere?

The pursuit of profit is crucial to capitalism — and every productive economy — because it aligns the incentives of those who have risked their resources on a business, namely the shareholders.

The contemporary political philosopher Tom Palmer says that, for incentives to be productive, the property right to a resource must be definable, defendable, and divestible. That is, it must be specific, have equal protection under the law to similar properties, and be able to be transferred to someone else exclusively.

Although profit is the common goal of the vast majority of shareholders, investors can make their choices based on other considerations such as social justice or environmentalism, but such decisions usually prove wasteful.

Investing in American manufacturing today would most certainly not be wasteful. U.S. manufacturing output grew 120 percent from 1970-2009 and 10 percent in the past ten years. American manufacturing output totaled about $2.1 trillion in 2009 compared to China’s manufacturing output of around $1.5 trillion.

And for those who say manufacturing growth in the U.S. has peaked, recall what an awful couple of years 2008 and 2009 were economically.

Objectively speaking, America remains the world’s manufacturing powerhouse and, thanks to new technologies, is becoming more productive every year. Whether our country’s counterproductive economic policies will allow this to continue is another question entirely.

I give Mr. Lind credit for one part of his argument on U.S. manufacturing. In describing the enormous value added by manufacturers overseas, he makes an outstanding case for free trade. The iPhone is a wonderful example of how America’s ingenuity not only creates wealth at home, but also exports it across the globe. If, like Mr. Lind, our legislators recognized the immense value of free trade, they would end all protectionist polices such as tariffs immediately.

On other matters, too, Mr. Lind and I can find common ground. Many companies comprising America’s “FIRE” (finance, insurance, real estate) industries have acted counterproductively (incentivized in large part by government policies such as the Community Reinvestment Act of 1977 and the Patient Protection and Affordable Care Act of 2010). Executive compensation deserves to be questioned by those with the proper incentives, and, indeed, the “Thatcher-Reagan-Blair-Clinton model of capitalism” hasn’t worked as well as its namesakes had hoped.

When it comes to pursuing a productive economy that allocates resources in the fairest way possible, there is no “third way” between free market capitalism and socialism. Thatcher’s term “popular capitalism” is newspeak, and Reagan’s inconsistent policy of cutting taxes while increasing government spending doesn’t serve anyone well in the long run.

Despite politicians’ actions and rhetoric, countries with liberal market economies continue to be the richest, most innovative, and dynamic places on earth precisely because they, in large part, allow individuals to take economic risks and reap the potential rewards.

An examination of wages, as an example of rewards, isn’t as simple as Mr. Lind contends, as most data examine static cohorts of workers rather than individuals who have actually improved their earnings over time. As the population has grown, more young and inexperienced people demand more entry-level jobs. But these workers, too, earn more than in the past.

Thoughtful critics of capitalism might ask themselves whether examples like that of Britain’s finance-dependent economy result directly from government policies that incentivize unproductive activities. Government spending in Britain is nearly twice that in the United States, hovering around 42 percent of GDP. Given a government that occupies such a large part of the economy, it is little wonder well-connected finance firms have been able to steer subsidies, mandates, and loopholes in their direction, not to mention talent.

Upon deeper consideration, capitalism’s critics might find themselves leveling accusations at the economic system of corporatism rather than capitalism.

The biggest fan of corporatism in the country is General Electric, which paid no taxes in 2010. It’s only natural that company’s former CEO Jack Welch would argue the notion of pursing shareholder value is “the dumbest idea in the world.” Given the subsidies and tax breaks GE gets from government, producing true value for customers and shareholders is probably an afterthought.

That was not the case for Milton Friedman. Although a fan of what the corporation could do to create value for society, he was no corporate apologist. He argued against policies that favored specific corporations at the expense of citizens and taxpayers.

Friedman had a lot to say about the social responsibility of a business. He wrote, “In a free society there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

Concerned individuals should take a hard look at the rules of the game as devised by government to see how we might make them universal rather than specific, just rather than desirable, and effective rather than merely well meaning.

Let the debate over capitalism continue, but let it be thoughtful.

Richard Lorenc is cofounder of Liberty Markets LLC, a Chicago-based firm that connects donors with entrepreneurial, free market nonprofits, and is the chairman of the Chicago chapter of America’s Future Foundation.