CAPITALISM II

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Some of you may have been confused by the last post on capitalism. You wonder how is it possible that companies are not doing enough.

Without giving you all the facts and figures, the main point is that the world is facing staggering problems in areas of global health, global homelessness, global climate change, global conflict, food security and agricultural development problems, energy instability or deficiency, water scarcity, gender disempowerment, unemployment, underemployment, education, youth leadership, etc. The list goes on. Yes, it’s true that most countries give a small percentage of their budget to help with foreign assistance, foreign aid, or international development. But this is not the same as the 1% of pretax profits the average company gives to charity.

To explain, let’s use the U.S. as an example. It is true that less than 1% of its budget goes to foreign aid, so it seems similar to the average corporation, on first glance. But remember, much of what countries do is domestic. If the US works on shelter and housing domestically, it’s the Department of Housing and Urban Development (HUD); if they work on it in foreign countries, it’s the U.S. Agency for International Development (USAID) or Department of State. If the U.S. works on energy security domestically, it’s the Department of Energy (DoE); in foreign countries, it’s USAID or State. If the U.S. works on public health domestically, it’s the Department of Health and Human Services (HHS) and the National Institutes of Health (NIH); in foreign countries, USAID or State (or the international parts of NIH, HHS, and a bit of Homeland Security). So when you say that the U.S. spends less than 1% on international development, remember the key word is international. They are also doing local or domestic development all the time.

Still, I do believe the government could do more. Generally, countries that spend a greater proportion of their budget on effective education and health have higher standards of living (Norway, Sweden, etc.). So I do want the government (around the world) to do more. However, I’m specifically speaking about corporations due to the limitations of government. Before talking about corporations, let’s think about the benefits the government has. It has 60 years of knowledge in foreign aid and over 80 years of knowledge since the New Deal (U.S. government). It has guaranteed income—the tax base. It can create legislation or use executive power. And it has existing administrative, programming, and financial infrastructure at the local and state levels. However, the government is limited by fraud, corruption, bipartisan politics, jarring bureaucracy. In trying to solve problems of global and domestic poverty alleviation, the government struggles (or doesn’t struggle) with national interests versus global need, disagreements about where the poverty line should be, lack of enthusiasm towards social programs for the poor (in the U.S.), and feelings that the non-profit sector, families, and churches should handle poverty efforts.

The non-profit sector also faces great advantages and limitations. Remember, when I say non-profit sector I’m including philanthropies/foundations, NGOs, charities (501c3 status) and non-profits which can have other tax exempt status. Generally non-profits enjoy being seen as credible and neutral. More generally, non-profits have the advantage of super-motivated volunteers and staff, potential ability to attract big contributions, field expertise (many NGOs have feet on the ground in various countries around the world or in local communities), and limited staffing, bureaucracy, and overhead. Obviously this does not apply to all NGOs, however, the big large NGOs are not most NGOs. Unfortunately, NGOs and the non-profit sector also deal with fraud and corruption like the government. There can be policy conflicts between headquarters and people out in the field. Money is always a problem. A lack of coordination between NGOs working on the same or related problems diminishes impact. And NGOs are always subject to the agendas or requirements of donors and host country governments.

And that leaves . . . you guessed it—corporations. Of course, social enterprises (the 4^th sector), NGOs and the non-profit sector are doing all they can. They can continue to improve efficiency, but they are doing a lot. Governments need to do more. However, corporations have not really scratched the surface of their potential to contribute to solutions to the major problems plaguing the world, today.

We looked at the short history of corporate charitable giving, Corporate Social Responsibility (CSR) movement, and Cause-related Marketing (CRM). So yes, to summarise, U.S. corporations went from 0 charitable giving in the early 1900s when they were barred from making such contributions to giving to arts and culture in the 1950s and 1960s. In the 1970s they began to give to civic causes, and then moved to national and global issues of poverty and social justice in the 1990s and 2000s. And yes, contributions grew from 0, then, to $14 billion in 2009. Still it’s a small percentage of the profits that companies pull in annually. Most importantly, CSR is still somewhat of a second thought and operates with problems and deficiencies in many companies. Here are few of the problems according to Simon Mainwaring.

• Giving is disproportionate to profits and salaries – The $14 billion in 2009 is small compared to money (billions) made by investors and top executives not to mention bonuses.

• Top executives are uninvolved and insincere – In a 2010 McKinsey survey of 1800 respondents, more than 50% considered sustainability to be “very” or “extremely” important. Contrast that with the fact that only 30% say their company invests in sustainability and embeds it in business practices, while only 25% said that it is a top priority for their CEO.

• Companies fail to understand CSR – According to the same survey, 20% of executives claimed their company has no definition of sustainability. Fifty-five percent thought that CSR related to management of environmental issues; 48% thought it was related to governance issues like ethics, regulations, and compliance; 41% thought it was related to social issues like worker rights and labour standards.

• CSR efforts are just window dressing – The great majority of companies still use CSR as a tool for public relations and their public image. Simon Mainwaring even quotes the Economist as saying “ . . . for most public companies CSR is little more than a cosmetic treatment. The human face that CSR applies to capitalism goes on each morning, gets increasingly smeared by day, and washes off at night.”

• Companies spin their CSR and CRM – Companies have been exposed for green-washing, cause-washing, and local-washing in order to market themselves.

• CSR results and measurements are scattershot – There really are no national or international standards of achievement in CSR. So few companies measure their results. Most of us use various watchdog agencies to watch, analyse, rate, and rank corporations on their socially conscious good work.

When I say “it’s not enough,” this is what I mean.

I’ll close with a report mentioned in We First. One of my favourite people is Paul Newman (God rest his soul). When he was alive he convened a group of CEOs and founded the Committee Encouraging Corporate Philanthropy (CECP). The CECP commissioned a report from McKinsey to project 10 years into the future to see if social responsibility was important for the future of corporations. The report predicted 5 important trends between 2010 and 2020: (1) a rise in the power of emerging nations, like China; (2) a shrinking of the labour force and talent pool due to demographic changes; (3) a global integration of capital markets, trade, and technology; (4) natural resource scarcities; and (5) competition among nations to attract work.

The report mentioned 4 scenarios based on how extensively corporations adopt true social responsibility.

Scenario 1 – People put greater demand on companies for social change and corporations react positively. Consumers began to trust corporations that they will agree to enact social change. Consumers and corporations become partners in actually improving the world. And governments allow corporations to voluntarily meet these social expectations.

Scenario 2 – Corporations try to adopt some social changes, but citizens fail to trust them. As a result, government and NGOs stop partnering with corporations to enact social change, and we are left with a “patchwork” of international laws and standards and a “bifurcated system of capitalism.”

Scenario 3 – Society’s expectations of businesses continues to rise, but companies refuse to enact changes for positive global impact. Governments enforce regulations reducing capital and increases expenses for companies. Citizens (who are also consumers) distrust companies creating a problem of expectations.

Scenario 4 – Societies and companies cannot match their expectations or their engagement levels so there is an ever-downward spiral of social responsibility. Trust in business drops low enough that the economy suffers exacerbating the very global social problems we are trying to solve.

The report says that only the first scenario is the logical and preferred scenario. Each of the rest does not have a beneficial outcome for corporations.  Which of the scenarios do you think is likely to happen? Do you see any other options or scenarios not listed?

CAPITALISM

It’s kind of the problem with capitalism and the current debate on economic systems brought to the forefront by the most recent economic recession, the Great Recession of the 2000’s. For the past five years capitalism, at least in conversation (not much, in action), has been called into question. People want to know if there is a better system out there. People know something is wrong, but they are not sure how to fix it.

Over the years people have tried to experiment, adjust, explore, and alter capitalism from laissez-faire capitalism to state capitalism, from crony capitalism (negative term) to welfare capitalism. The list goes on. Even though countries that switch or move closer along the spectrum towards free-market capitalism, usually experience macroeconomic growth, problems still abound. Simon Mainwaring makes a good list of the problems with free-market capitalism in his book We First.

1.     Capitalism allows a small class of people to amass most of the wealth and use it to dominate the investment markets, corporations, and the overall business environment.

2.     It is prone to inflationary periods and bubbles that eventually collapse, wiping out investments.

3.     It is prone to allowing, in the name of profit, the worst of human nature, namely greed and selfishness, to run rampant and manipulate the system, especially when government regulations are absent.

4.     It is subject to unstable behaviour on the part of investors, whose impulsive actions can seriously impact global markets.

5.     Its single-minded pursuit of profit above all other factors takes a huge toll on average workers and their families, who are cast aside when wealthy investors and corporations are willing to sacrifice social progress for purely personal gains.

6.     It encourages corporations and businesses to think only about short-term profits at the expense of environment.

So from the boom-to-bust cycle, instability, inequality, incentive for short-term profit-prioritising greed, and the neglect of social costs and values outside of financial losses and profit, there are a lot of problems.

Now before we look at a few of the solutions people pursue, it is worthwhile to address whether free markets, themselves are corroding human character and causing this. I’m working on an essay on this topic for another project and a lot of other essayists respond, like Churchill once said (and I paraphrase): “It’s the best system we’ve got.” However that’s a weak statement in my opinion because it is only a comparative, relative statement, leaving the question unanswered. I want to know if the best system we have is a problem, and, if so, let’s work to create one with fewer problems. So I ask again, do free markets corrode human character?

In truth, the ideal free market is amoral. It is not just an invisible hand (Adam Smith), it is an amoral, invisible hand. It leaves the door open for moral behaviour or immoral behaviour. In an elementary sense, the morality of a free market is determined by the morality of the players within the market. The free market is only moral or immoral in as much as you view the lack of price-fixing or price-setting as a moral or an immoral omission. That omission is on the part of the government not necessarily the market itself. In other words, an ideal free market is just a place in which prices are set freely by supply and demand, by consumers and producers without regulation. Consumers and producers can act in any way they choose including participating in legal activities that affect the price favourably for themselves. This legal behaviour is not necessarily moral. And this leads to one of the huge problems with free-market capitalism: it leaves huge incentives and tremendous pressure on market players to break the rules of good conduct in order to win and meet the bottom line. Then it also encourages players to give justification for doing so. Eventually these justifications and self-deceptions do corrode human character.

How does this happen? Well, it doesn’t matter if the ideal free market is amoral. There is no ideal free market in existence today. All markets are situated in a particular time and place and in a specific cultural and institutional context. Real markets are mixed with some degree of regulation such that the “freeness” of the market is a spectrum as you go from country to country. So it only makes sense to analyse real markets in real cultural and institutional contexts because this is the only way they actually exist. And it is in these real contexts, for instance in the U.S. capitalist market, that we see such tremendous pressure to break the rules of good conduct to meet the bottom line, perhaps legally, but not morally.

However, how you answer the questions depends on your own morals. On one hand, if freedom is the highest aim in your moral system, then a free-market capitalist system might be more morally improving upon human character. Moreover, markets can improve certain morals. Markets are a means of social integration; they can be relational. People can come together and interact. People must learn collaborative and cooperative skills to participate. They must form partnerships. They must connect, in other words. And it’s possible to learn empathy, form bonds, create trust, and experience solidarity. To be part of a market as a producer, you must work hard, take risks, be innovative, set visions, think ahead, stake out the playing field. It can develop within you a strong work ethic and increase your industriousness.

However, at the same time, the risks in the free market can be quite high, so high in fact that people can begin to distrust one another, betray allies, and conceal plans. Once again the tremendous pressure kicks in and we have extreme public examples like Enron, the Great Recession, and the Madoff scandal. There are many more not as public or not as extreme, but they are there.

People will always point to free-market capitalism and say that it has done wonders around the world in history as people moved to it. Look at the move from European feudalism to the capitalism of today or the move from Japanese isolationism to its capitalism of today. Usually in the first generations you do see rather great moral character from industriousness, dedication, innovation, and risk-taking efforts. However, from my biased experience, there seems to be an effect over time. When someone individually pulls herself up by her bootstraps and makes a way for herself in the world, those same qualities do not always pass down to children that are now born in a family much better off than the original family of the woman who pulled herself up by her bootstraps. When children are born into wealthy families, they may take what the family has for granted. They don’t necessarily have an incentive to take risks, work hard, and be innovative, the same effects on moral character do not perpetuate. In fact, the sociologist Daniel Bell would say you observe (in cycles) a general decay in moral character in societies after generations of wealth accumulation because the incentives change generation after generation. Children become rebellious or seek escape; they take for granted the prosperity they have. So usually when people point to the improvement of moral character due to capitalism I ask if they tested it long enough. I’m always interested in the long-term or overall effects, not just in the short-term effects.

Still I’m told it’s the best system we have in the world. Look at the dehumanizing and demoralizing effects of communism? If free markets corrode human character, communism and fascism corrodes it absolutely or to a greater extent. This is when I get excited.

I like to learn and talk about such things and then imagine other alternatives. I love the general critique on communist economic systems. It’s equality but forced equality. Communism forces people to do what they don’t want to do (share). Capitalism gives people the freedom not to do what they do not want to do (share). One is good at production and bad at distribution; the other is good at distribution but bad at production. Free-market apologists tend to criticise communism on its communal human character. It doesn’t produce or boost the macroeconomic GDP and in a correlated sense, the macro-happiness. I love this. They understand that there is such a thing as communal human character. People under authoritarian experience a loss of aspiration and a degradation of moral character due to a loss of free will (essential for moral character). A system like the USSR experienced communal terror. I read the story of one East German citizen who said in such regimes and economic systems you generally lose the ability to take risks, you lose the ability to make decisions as a society. Far from critiquing an individual loss, he was making a communal statement about most citizens in that city. Usually individual critiques are left for corrupt and power-seeking military, police, and government officials. This is great critique. Somehow a communal understanding of free market capitalism is lost.

It’s not just that a single person, like Bernie Madoff, has an incentive to conceal, deceive, and steal to make his bottom line, it’s that on a communal level, in the same way, we do not call it stealing when money can be shifted from the poorer classes to the rich as in predatory lending (and now predatory microfinance). So we regulate theft and extortion on individual levels but there are forms of market behaviour which fall under extortion or theft (such as the ability of big business to unfairly influence the price of the goods they sell) which are not regulated. This is a type of degradation of communal human character that I see and a type we do not address as readily as individual character flaws and individual actions and ethics due to a love of individualism—the supremacy of individual freedom. What I look for, find beauty in, and prefer is individuality without individualism, a type of unity-in-community, being-in-interbeing. Without individualism, we can be more than just individuals, we are interdividuals (René Girard). And it’s this aspect which seems to be missing from our understanding of self-interest in free-market capitalism.

So I’ve been pondering all these things and reading this We First book (about We First capitalism) and noticing all the different attempts in the world to mitigate the effects of capitalism. People have come up with ethical capitalism, co-op capitalism, yellow capitalism, creative capitalism, philanthrocapitalism, constructive capitalism, creative capitalism, conscious capitalism, etc. The list goes on. All of these attempts at revising capitalism point to the growing realization that something is wrong with the current system. Even if free markets do not corrode human character, certainly, human character tends to be corroded in such contexts. You can blame it on the market or our moral failings but we definitely need to change a few things.

This is where we often forget that consumers are a big and large part of the free-market capitalist system. Consumers have as much moral agency for change as producers, and there is power in the pocket or the purse. And so producers, manufacturers, retailers have slowly made changes, not because they gained a larger perspective or profit and value in society but because, out of self-interest, they fear the loss of monetary profits in a changing, more socially conscious (at least vocally) world.

I won’t bore you with stats and research, but consumers want a better world. One of the best ways to increase profit is to respond to the consumer desire for purpose, according to Mainwaring, because the future of profit is purpose. I have a slightly different view but let’s look at the history over the years. This history of corporate social engagement makes me feel Jeffrey Sachs is right when he says we really haven’t done enough.

Due to some environmental movements, in the 1970s we saw the start of The Body Shop and Ben & Jerry’s Ice Cream which launched earth-friendly socially responsible products. By the end of the decade, companies like these two were still aberrations from the norm.

It took a while but companies began seeing the benefit of socially responsible behaviour by the late 1980’s. So at that time and in the early 1990’s companies began reducing waste, cutting energy usage, streamlining inefficient processes, and giving to charitable causes. These were the famous Corporate Social Responsibility (CSR) efforts. People went to workshops, held talks, attended conferences, took classes. Graduate schools started giving MBAs with a CSR focus. Recently, some companies have hired a Chief Responsibility Officer (CRO) to run CSR efforts or a Chief Giving Officer (CGO). Today all the Fortune 500 have a CSR programme or giving campaign or both.

Two other movements were happening at the same time in the 1980s and 1990s. Companies started launching foundations—independent, non-profit foundations, and in 2009 we had 2500 corporate foundations in the U.S. Secondly, cause-related marketing (CRM) campaigns were launched. American Express is reported to have launched the first one in 1983 when it advertised it would donate $1 to the Statute of Liberty restoration fund for every new card application, and 1 cent would be donated for every transaction made by cardholders. It raised $1.7 million and many companies have been running cause-related marketing campaigns in partnerships with non-profits ever since. The belief is that cause-related marketing challenges consumers to prove how much they care about a cause and turns consumers and brands into partners helping to create a better world. Today corporation funds donated through CRM have risen from zero in 1983 to $125 million in 1990 to $545 million in 1998 to $1.52 billion in 2008. You get the picture.

So what’s the problem, right? Well, the question is the motive, and the proof is in the percentages. On average, most corporation donate only about 1% of pre-tax corporate profits to charitable causes and this rarely exceeds 1.5%. In 2009, corporations gave $14.1 billion in charitable donations, but given the amount of problems we face in the world today, $14.1 billion is not enough. Corporations really have a long way to go in showing that the future of profit is purpose or transitioning to a We-first capitalism, the type that Simon Mainwaring advocates. Defenders of 1% giving would say that corporations have a fiduciary responsibility to maximize profits for shareholders. However, if corporations are trying to partner with consumers to make a better world, it really isn’t enough. The CSR, CRM, and charitable donations are not enough, especially compared to the potential to do good, and we cannot wait for capitalism to change. So we change it ourselves.

First, the very fact that you have a CSR department, means that social responsibility is not embedded throughout your company. It’s probably seen as an afterthought or the specific domain of a particular office or division. Can you imagine a company that had a manners, values, or mission department? Probably not, it is supposed to be so embedded throughout the company in everyone’s work that it is everyone’s job to embody the values and pursue the mission. Though there is benefit in having someone to check and streamline socially responsibility efforts (we do it with finance and legal considerations), the unintended negative consequence is that it becomes something that someone else is in charge of: I must make sure I do what I need to do to appease or satisfy that person or requirement. CSR should be throughout the company, executive board, and board of directors in everything they do. It must filter throughout the company from top to bottom vertically. We are not there yet.

Secondly, it must be horizontally throughout industries. It’s no good if one company is doing it but another is not. We need all companies and businesses to move towards purpose.

Third, we need to move from a world in which social responsibility is only for producers and businesses. It really is mutual responsibility, and in addition to the power of the purse, social media has truly empowered consumers even more to direct companies in the right direction towards purpose, a wider definition of profit.

However consumers have not always done a good job with this. Consumer action in the face of tough choices is another way in which the free market might sometimes corrode human character. Whereas Professor Robert Reich of UC-Berkeley would say that we don’t know if the free-market corrodes human character because people, when faced with a morally objectional purchase option, ignore the moral objection or push it off. However, I believe this ignoring or pushing away actually shows morals rather than hides it. Consumers, when faced with a great market deal that is morally objectionable (like buying from a company that pays low wages), ignore the conflict by pushing the blame to the seller or producer. In my perspective of the same situation, that is corroding human character. Pretending not to know or pretending not to be complicit is corrosive.

So the definition of value, profit, and sustainability must change. Sustainability is not just enduring or lasting but also life-giving. In essence, if it’s not life giving in the very end (ultimately), it not sustainable. We want to change things before its too late.

Economically sustainable capitalism is not something that is done at the end through charitable contributions. It is a way of ensuring that profit is defined in terms of economic outcomes globally as well as long-term economic outcomes rather than short-term economic outcomes. In this way, you can avoid a situation in which a company pulls in huge profits only to harm the town in which it is based and therefore go out of business. It also makes no sense to profit in a way that causes a recession.

Morally sustainable capitalism is not something you balance after selling your product by giving to a counterbalancing non-profit. We have to define bottom lines not just by monetary profit, but also people profit (how does it affect people and society in the long-run) as well as environmental profit/value (how does it affect the environment in the long-run).

Ethically sustainable capitalism must not be something that is determined only by the letter of the law. But in the case where the law is lacking, the moral compass of individuals within the company should guide it to see ethics as what it is – a field that governs how the actions of an entity or individual affect society in right and wrong ways. Ethics has become individualised for corporations that have individual rights but lack responsibility on par with individual citizens.

Environmentally sustainable capitalism must not be something that happens after production where you clean up carbon and pollution. Your entire production process should never create harmful pollutants. You need a type of clean production model and framework.

Yet today we have a type of nice capitalism that brings joy by trying to clean up and save with one hand what it dirties and destroys with the other, as philosopher Slavoj Zizek notes.

So I’m wondering when we’ll move to a day where, instead of worrying about what next adjective to put in front of capitalism to make it better, we just let our minds go wild and come up with a new alternative that is different and most importantly better than anything we ever imagined. I have some ideas, but they are more akin to versions of capitalism. Still it will be fun to try in the future.