Capitalism is a strong brand. It has served its citizens well in the past. But today, it’s in serious need of renewal if it is to continue to be relevant and strong in the future.
If we think of Capitalism as a brand it might give us some insights as to what has gone wrong. Capitalism, quite simply, has lost touch with its customers—its citizens, or citizen-customers we might call them.
Between 1982 and 2010, the top-earning one per cent of Americans captured 59.6% of income growth in the United States. For Canadians, who are often smug when comparing themselves to the USA, it’s even worse—the top-earning one percent of Canadians captured over 60% of all income growth during the same period.
This is having a huge impact on the middle class as their dreams and aspirations are being eviscerated. As a brand, Capitalism must be refreshed, reinvigorated, and transformed if it is to maintain its relevance.
It must earn the loyalty of a new generation of citizen-customers, a generation that has never experienced the halcyon days of the last century when capitalism flourished, brought prosperity and opportunity to its citizens, and brought its competition, Communism, to its knees.
For the under twenty-five generation their reality is different; Capitalism is associated with greed, pessimism, high levels of underemployment that offer dim prospects, and a growing divide between the middle class and the rich.
Capitalism must also re-earn the loyalty of a generation who will be severely tested as they look forward to see diminishing pension benefits and poor prospects for retirement.
Capitalism must recognize the symbiotic relationship it has with the citizens it serves, and whose support it must have if it is to continue to be relevant. It must find a way to serve the interests of the many, rather than just the few.
What’s the way forward?
Roger Martin, the former dean of the Rotman School of Management, and Dominic Barton, the global managing director of McKinsey & Company, are amongst those who have written about the causes of Capitalism’s current troubles, and who have provided ideas about how brand Capitalism can renew itself for its citizen-customers.
There is only one valid definition of a business purpose: to create a customer. Barton and Martin conclude that [the brand called] Capitalism has lost its way because of the idea that the purpose of the firm is to maximize shareholder value—enrich its owners—rather than serve its citizen-customers.
Martin postulates that:
The trouble began in 1976 when finance professor Michael Jensen and Dean William Meckling of the Simon School of Business at the University of Rochester published a seemingly innocuous paper in the Journal of Financial Economics entitled “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure…Ignoring Peter Drucker’s foundational insight of 1973 that the only valid purpose of a firm is to create a customer, Jensen and Meckling argued that the singular goal of a company should be to maximize the return to shareholders.
Therein lies the problem.
Barton and Martin say that business needs to recalibrate and refocus its efforts on creating compelling value for its customers. That’s the best way to serve the interests of its shareholders.
I concur. Capitalism needs to recalibrate and refocus its efforts on creating compelling value for its citizen-customers. That’s the best way to ensure that Capitalism stays relevant and continues to serve everyone it serves.
Capitalism’s best days were when it offered its citizens the promise of a better life and served the interests of the many rather than simply enriching the lives of the few.
If Capitalism’s best days are to lie ahead, those who most influence the direction of our chosen economic system must recalibrate and refocus its efforts on doing what it has proven its capacity to do in the past: to serve its citizen-customers by enriching their lives.
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Great post, Ashley. I am in your corner on this one. The discourse about this has been growing over the last three years or so, and let’s hope that it grows well beyond the academy and colonizes the minds of the business community. Thinkers like Michael Porter (Shared Value), gary Hamel (Conscious Capitalism) and Umair Haque (The New Capitalist Manifesto) have, along with Roger Martin, led this cause. I have blogged on this topic many times and so am pleased to see you are spreading the word too!
It just makes no economic sense to continue along the path initiated by Jensen and Meckling – and aggressively proselytized by the likes of Milton Friedman. Your opening says it all: business needs customers. If your base has had its buying power taken away from it and diverted to a handful of investors, there will be nothing left to invest in.
Hello Will, my thanks for taking the time to read my post and to share your thoughts here. It seems we are in agreement on the challenge for brand Capitalism. Have a great weekend!
Ashley – always a fan and glad you committed this POV to paper. The irony is people commit their pension funds to the same ruthlessly focused companies that maximize shareholder value by strip mining their assets and pulling all socially-minded investment. Similarly we decry WalMart and other “big box” stores for eradicating the small independent store owner on the high street…yet we scream for lower prices to make ends meet. This (non) virtuous cycle has to be interrupted. By buying stock in these companies, or putting money in their tills, we send a very vibrant message of tacit endorsement of their actions and attitudes. This is not a wooly-headed call to join some utopian commune but a request for a return to common sense and a worldview that extends beyond a quarterly earnings horizon.
Ashley. Martin’s approach has already been christened Autistic Capitalism. It certainly does need resetting but shareholders are seeking ever shorter cycles between returns. This ever decreasing cycle needs breaking.
Ashley – thank you for your post. It, and the replies to it, are thought provoking. I think lost in the (presented) competing definitions for the purpose of a firm is that not only does it need to create customers and return value to shareholders, it must continue to please its customers to maintain a customer base – thereby continuing to create profits. I think you started to hit on this when you stated “Capitalism must recognize the symbiotic relationship it has with the citizens it serves, and whose support it must have if it is to continue to be relevant. It must find a way to serve the interests of the many, rather than just the few.”
Successful capitalist ventures (such as WalMart and the other “big box” stores mentioned in hiltonbarbour’s comments above) must do this – and in fact are large and successful because they do this. They are continuously assessing what customers want and trying to give them what they want at competitive prices. I find it ironic that these large corporations are regularly demonized when they are trying to give the people what they want. This stands in stark contrast to excessive government regulations, that favor lobbyists and special interests to determine the ‘winners and the losers’ in the marketplace.
I think that every time we spend money in the marketplace we are voting for what we want. While some government is necessary and good, too much government is not healthy for a free marketplace.
While I generally agree with your post, I think the solution you provide in the last few sentences is already happening. Successful businesses are always recalibrating to give the customers what they want at a perceived value. The ones that fail to do this are not competitive, unless they are the recipients of government largesse – which is not truly representative of the wishes of the customers. How ironic it is that the success that stems from giving the customer what they want often turns into a resentment of that success.
My opinion on the necessity to rebrand capitalism is that it primarily needs to be rebranded to people that are ignorant of how capitalism has served them. This ignorance was proudly on display during the “occupy” movement, and sadly is prevalent on the campuses of many of our institutions of higher learning. Fortunately, as many people mature their experiences will correct the poor instruction they received from the ivory towers of academia.
IF you really want to rebrand capitalism, it will need to be objectively compared to alternative economic theories in our institutions of higher learning. This is unlikely given the worldview of a majority of the staff and faculty at most campuses will typically decry the ‘evils’ of capitalism and income equality.
Nice post, Ashley, but I see the root causes differently. In my view, there are two kinds of capitalism: Capitalism (Big “C”), which is a cultural system with free markets, and capitalism (small “C”), which is one of monopolies and crony capitalism. The latter is what is occurring now. Big corporations, big banks, et al are focused on gaining political favoritism and protection by government. The big bailouts went to those with political connections. Under Capitalism, those companies would have—and should have—failed (GM, as an example). Instead, they were propped up, kept alive for political purposes (donations and votes) and still doing what got them in trouble in the first place.
Capitalism is about destruction. Creative Destruction—losers are supposed to fail and new ideas spring up. That’s how the consumer benefits, with a wider array of products at ever lowering cost. But under the current system, it doesn’t matter whether your operation is profitable or you make things that people want or not; if you have lobbyists or political connections you can get protection against failure through tax loopholes, subsidies (like ethanol, the biggest scam in decades), and bailouts. The best example lately is the renewable energy sector, where governments have poured tens of billions into new start-ups. Within 18 months of receiving funding or load guarantees, these companies file for bankruptcy—the owners who were politically connected to the White House were bailed out, employees lost their jobs, and taxpayer money went up in a puff of smoke. Solyndra is a classic: $535 million gone in months. The examples during recent years are the worst I have seen at anytime in modern history.
When governments starting picking winners and losers and supporting monopolies, Capitalism becomes crony capitalism. As Matt Ridley wrote:
“Today’s private sector, by contrast, is increasingly dominated by companies that are privileged by government through cosy contract, soft subsidy, convenient regulation and crony conversation. That is why it is producing such unfair outcomes. The solution is to open markets.”
When nations adopt a Capitalistic culture, and there is a shift in what people think about markets and commerce, the middle class flourishes. Dierdre McCluskey wrote in her trilogy on the bourgeois:
“Give the middle class dignity and liberty for the first time in human history and here’s what you get: the steam engine, the automatic textile loom, the assembly line, the symphony orchestra, the railway, the corporation, abolitionism, the steam printing press, cheap paper, wide literacy, cheap steel, cheap plate glass, the modern university, the modern newspaper, clean water, reinforced concrete, the women’s movement, the electric light, the elevator, the automobile, petroleum, vacations in Yellowstone, plastics, half a million new English-language books a year, hybrid corn, penicillin, the airplane, clean urban air, civil rights, open-heart surgery, and the computer.”
The Occupiers blaming Capitalism for the inequities are really protesting the fruits of crony capitalism. And, their socialist solutions would certainly worsen the situation by increasing the interference in the marketplace that created the situation in the first place. They want more controls, not less. I assume they never saw the wide range of consumer’s “choice” in Moscow in the ’70s.
Companies must be allowed to make profits, and distribute them to employees and shareholders. But, when those profits only exist because of protected markets and monopolies, subsidies, loopholes or favoritism, everyone, except the politicians and the 1%ers—I find it hard to tell the difference—lose.
The solution is to sever the direct relationship (i.e. the money stream) between politicians and lobbyists, remove the favoritism, and let the consumer’s wallet decide who wins and loses in the marketplace instead of the deal-makers in the backroom.
Very nicely stated.
Hello Dave, Rob, Sean, Hilton, my thanks for taking the time to read my post and to add your comment on my blog. Much appreciated.
Thanks, Ashley, for your important post and for adding fuel to the discussion. I believe that there is an alternative to capitalism. I call it the generative economy and it’s one in which business owners innovate, cooperate, and generate on behalf of the generations. It’s an economy that seeks to optimize the human experience for all the stakeholders – owners, partners, vendors, community members, environment, customers and employees. I am excited about the possibilities. Thanks again for the post.
A provocative discussion … good!
There is definitely ‘something rotten in the State of Denmark’ with contemporary capitalism. It has lost its moral purpose (some would argue it never had one!) and has serious social mission drift. It has become a byword for obscenely disproportionate salaries, zero hour contracts, the benefit of the few over the majority, state disconnection leading to an inability to see its social responsibilities in the communities with whom it seeks to trade.
The fact that there is an open conversation that challenges the way the system has gone severely awry over the past 50 years is healthy – the issues are of course complex.
But for capitalism to survive it needs to seriously address its relationship with society before society addresses its relationship with capitalism (we’ve been there before with bad results!)
Good point Ashley, although if I agree with the problem you highlight, I’m not sure that the major source of the issue is firms focusing on shareholders, at least not directly. Focus on quarterly results and continuous growth in profitability is something that has been forced upon publicly traded firms by the main culprit, namely the financial sector. Following Sean Peake’s response to your article, I certainly agree that this sector has become too close to the governing institutions. How did this happen?
After WwII and up until the early 80’s, capitalism was working as it should; entrepreneurs taking risks and being rewarded if successful. Relatively high taxation of the very top revenue brackets and a growing middle-class of consumers. As the focus on the Eastern Bloc was becoming increasingly irrelevant with the soon to be defunct Soviet Union, some members of the elites wanted to move beyond just getting rid of communism and made increasing attempts at reducing all aspects of the State, thereby following the neo-liberal doctrine of intellectuals such as F.Hayek. The outcome of this under the politics of Reagan in the US and Thatcher in the UK was privatization of many sectors, even when it didn’t make sense (e.g railway infrastructure in Britain), reduced taxes for the 1% and a growing influence of the financial sector (global financial deregulation played a major role in this). The latter is not only able to pressure firms to grow at any cost, play against their own clients (e.g sell Greek debt to bank clients and then bet against Greece in the markets), but is the only industry were you can make a revenue when you don’t fulfill the mission your clients trusted you for (you still pay management fees even if the bank loses part of your investment). So, how can we move away from all this?
We first and foremost must recognize that free markets are as much of an utopia as was communism. There will always be agent issues and information asymmetry in most markets and unlike many neo-liberals like to claim, many people don’t enter into markets out of free will (their position in the economy can seriously bias the market operations in favor of the other party). Once this is accepted (I know this will be difficult for many Americans who’ve been brought up to think that this is the only alternative to communism/socialism), we, the people in democratic countries, need to force our elites to strongly reign the power of banks. This could involve forcing lending to smaller firms (they create most jobs), not allowing investment on bank nostro accounts (banks could only invest their clients’ funds, not gamble for their own profit) and only requesting bank clients pay fees when the banks increase their assets. Finally, some form of global financial re-regulation is probably also needed to reduce capital mobility (should a fortuned US citizen invest in producing goods in China at a cost that US firms can’t compete with, as the latter need to abide with environmental regulations and can’t used forced labour?).
Would love to hear readers opinions (and please, dear friends from the US, please refrain from calling me a socialist just because I question the mainstream approach, as I am a strong believer in entrepreneurial capitalism).
I haven’t read “Capitalism Hits the Fan” by Richard Wolff (Harvard, Stanford, Yale grad), but I saw him on T.V. on Sunday morning. “The Market” isn’t what makes things happen in its mythological power sense. Business and Economics need to communicate better, and capitalism is bound (by financial obligations to those in power) to keep that from happening. A revolution of some sort is all that we can hope will get us out of this dysfunctional economic mess. That’s what I understood from his observations.