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Can capitalism survive without purpose?

What is business for?

For most of the past three decades, there was a general consensus around how and why capitalism worked: by pursuing their own self-interest, companies and individuals ultimately benefited society.

This, in a sense, was the idea first put forward by the man considered the father of modern economics, Adam Smith, in probably his most famous quote: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

At a corporate level, this was reflected in the idea that the sole purpose of business is to maximise wealth for its owners. For publicly listed companies, that meant acting always and only in the interests of its shareholders.

Spreading the love

More recently, however, this has begun to be questioned as the benefits of capitalism have failed to reach across society. Earlier this year, the US Federal Reserve published research showing that there has been a growing concentration of wealth in the richest 10% of the population since 1989, while the bottom 50% have seen no benefit at all.

Source: US Federal Reserve

 

This reality has led to a growing disquiet. It is manifested in more populist politics, on both the right and the left, that is increasingly nationalist, anti-globalisation, and often anti-business.

In South Africa, it has been most prominently expressed in the idea of ‘white monopoly capital’.

The accusation inherent in this label is that business has been extractive – that it has taken far more value from society than it has ever delivered. In some industries, it is very hard to argue that this isn’t the case. Deep level mining and unsecured lending would be the most obvious examples.

 

Business has also faced growing criticism around its role in climate change. Fossil fuel industries, in particular, have been targeted for seeking profits at the expense of the environment.

Changing perspective

Given this scrutiny, companies have been forced to reconsider whether the way in which capitalism has been practised since the 1970s is sustainable. In August, a prominent group in the US acknowledged that it isn’t.

Business Roundtable, which represents the CEOs of many of America’s leading companies such as JPMorgan Chase & Co, ExxonMobil, Apple and Amazon, issued a statement that set a new standard for their corporations. The 181 corporate leaders who signed the declaration committed to running their businesses not just in the interests of shareholders, but more inclusively for the benefit of all stakeholders – including customers, employees, suppliers and communities.

“Each of our stakeholders is essential,” the statement concluded. “We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”

A similar sentiment was recently expressed by Siemens in South Africa, which called upon local companies to play a role in uplifting society:

“Although the notion of shared value, CSI [corporate social investment] and businesses giving back to the communities in which they operate is nothing new, it is becoming more imperative for businesses to integrate the well-being of society into their core objectives,” the company noted. “In many instances, contributing to society is a secondary objective for businesses and yet without a healthy flourishing society, we cannot be successful in business.”

Seeking relevance

In essence, these companies are acknowledging that their only purpose cannot be profit. They cannot exist independently of the society in which they operate, and so it is in their best interests to more directly benefit all of their stakeholders.

“For business purpose to have resonance, it should be beyond just a pure profit motive and reference some kind of social or environmental outcome,” argues Jon Duncan, head of responsible investment at the Old Mutual Investment Group.

“Strategically, they have to position themselves to be relevant in a changing world.”

More companies are being explicit about expressing this purpose because increasingly it is what is being demanded of them from customers, potential employees and suppliers. People want to be associated with businesses that are socially and environmentally conscious.

Chris Bischoff, a research analyst at Reputation Matters, highlights the stance taken by clothing brand Patagonia as an example:

“Their mission statement is ‘we are in business to save our home planet’,” Bischoff says. “They call themselves an environmental activist company.”

This might be a particularly extreme example, but the pressure that capitalism is facing demands that all companies define themselves in ways that explicitly express their purpose. Just making money for their owners is not enough.

This does not mean that businesses shouldn’t be set up to make a profit, but that profit should be the product of a more inclusive, and socially and environmentally conscious approach. Capitalism, and their own companies, may not survive if they don’t.

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Perhaps the bottom 50% should copy what the 10% is doing and then they will join the richest 10%!

Exactly! Perhaps if they started to work work smarter they can join the 10%…. but it is always easier to moan and say it is not fair. You reap what you sow…

One of the first things the bottom half should do, is to have two or fewer children. Having twelve kids with three different women is not going to do anything to lift you or your children out of poverty.

The real question is: Can capitalism WITH purpose survive? Capitalism is looking more and more like socialism. And we know how that movie ends.

I would suggest that a far better example than mining or unsecured lending is the taxi industry.

The capitalism v socialism debate is a non-issue.

The people chooses the government – the government makes the rules – capitalism or business plays within those rules.

Do you now blame the people, government or capitalism?

When the politicians do not do their work they blame capitalism.

Has the percentage of the worlds population living in extreme poverty decreased or increased over the last 100 years? What has contributed to this?

What regions have experienced a decline and where has it increased? Why? A clue is that extreme poverty has increased north of the Limpopo.

The wrong question is being asked.

Politics at the national level is the same as politics at household level.

You need someone from the household to bring in the money (capitalism) and someone else to spend it for the household (socialism). If both do it well there is harmony and progress.

I agree with your previous comment but your view of socialism here is totally wrong. A household that functions as you describe will not function at all.
Whomever holds the purse strings makes the calls.

Black people has benefitted from White Monopoly Capital (WMC) over the past hundred years.

Their savings and pension funds were invested by the institutions into the best companies SA had.

Black people could also directly buy shares in the best companies on the JSE.

They did so in limited amounts because they were badly led by the socialists and communists.

Commentators expect way too much from capitalism. A socialist system can only exist for as long as it can parasitise the remnants of the previous capitalist system. When the last remains of the benefits left behind by capitalism have been redistributed, the system implodes in hunger and disease, Venezuela- and Zim-style. Under the ANC, this is our destiny.

It is wrong to judge capitalism, with its attributes of property rights and individualism, in terms of equality, the Gini-Coefficient or social justice. The value of capitalism should actually be measured in terms of life expectancy, birth-rate and the availability of medicine and food.

These very benefits that are delivered by capitalism are actually used by socialists to attack capitalism. They see inequality, they see people who are relatively poor, they see people who have to settle for lower standards of healthcare and they blame capitalism. They fail to realise that these people who they claim to represent, would not have been born, or would have died of hunger and disease if capitalism did not keep them alive. These individuals who see socialism as the great equaliser, never pause to reflect that their very existence is due to the unique benefits of capitalism.

Capitalism delivers 2 concepts that are lacking in a socialist society and those 2 things are the difference between life and death. Capitalism brings the price signal, the value of goods and services, that results from property rights and without which there cannot be an efficient allocation of scarce resources. The price signal serves as an efficient allocator of resources. The second crucial factor that is inherent to capitalism, is the motivation or incentive to improve yourself, to take risks, in order to satisfy the needs of the consumer.

Without these two crucial factors, society is doomed for extinction as described by the Malthusian Trap.

Nobody in Venezuela or Zimbabwe shouts for equal rights and justice, they don’t vote for equality or redistribution, they just plead for basic foodstuff, TB medication, insulin and AIDS medication. Socialisms a highly contagious and deadly disease. People flee from socialist regimes, they walk thousands of kilometres to illegally enter into jurisdictions where property rights are respected.

Excellent comment.

The one thing capitalism has done – though I would hesitate to call it capitalism and not just plain old human nature – is to exterrnalise costs at each and every stage of “progress”.

Hence the difficulty being experienced in trying to put a price on carbon. The co2 emitted is an exterrnalised cost and nobody is interested in paying for this since, for all these years gone by, pollution has been free.

And so it goes with nearly everything. America has externalised its costs to the sweatshops of Asia and India, and its emissions to China – all the while bragging how green and sensitive they are in California.

It’s this exterrnalising of costs that’s now in the process of bringing us the 6th mass extinction. Will we adapt in time?

Of course not.

Interestingly, the same analysis is not applied to unions, particularly in SA.

While the union bosses obviously have a mandate to care for their members, they, too, should be aware of their social responsibilities. In this regard, the crippling of SAA by the unions stands out. Further, the educational genocide (there really is no other term) committed by the SA “Democratic” Teachers’ Union is particularly egregious, robbing their charges of any chance of a employment, further education and a decent life; preferring to defend entrenched interests and even pupil-rapists.

The purpose of a Company is to return the invested capital plus a return. It does not exist to save the amazon or fix human rights. Saving the amazon and other moral choices are deductibles from the acceptable return.

So say Apple and Capitec both earn 30% return on capital (ignoring for the moment the vast difference in quality of earnings and cashflows). As an investor I have to choose among Apple and Capitec. I choose not to invest in a return on the loan shark industry, so I chose Apple. I live with that choice.

What really really really messed with capitalism are (1) the fund managers make no moral choice (2) the hired help are paid obscene amounts of money in a system that encourages a culture of journal entry results presentations. Compare the cashflow backing of real companies like Apple to the journal entry fired results of companies like Naspers and Capitec. Hint : compare earnings per share to operating cashflow per share… if you do not get a very high correlation you should run for the hills

Nothing can survive with corruption and incompetence at this scale

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