Capitalism 2.0

It's kind of funny that I get an urge to discuss, or rather to defend capitalism. For I'm neither an economist nor philosopher, but a mere profit seeker with an utterly selfish agenda. But somehow it seems to me that for my own sake, and that of society, capitalism is in need of defending.

To size up capitalism's impact, imagine that human greed was extinguished some 250 years ago, at the dawn of the industrial revolution, let's say by a nerve gas dropped by an alien invader. Thanks to this gas we're no more greedy. Competition for profit would've ceased, with it the strive for innovation vastly slowed down. What we now call Socialism would've prevailed. The majority of the good stuff we take for granted now would not have existed. In the 21st century, our living standard would've at best been on par with that of the early 20th century. If per capita GDP is used to measure our well-being, it would've likely been less than one tenth of what it is now, while life expectancy would've languished at less than 60.

We kind of think and say that the owners of capital have been "taking capital away from" society. That's why we say "return it to society" when we engage in charity. The truth is capital never left the economic system. When we make money, the money (which is nothing more than a journal entry) has always stayed within the system, largely being controlled by the banking/capital allocation system and doing productive work by contributing to society's well-being. We should really stop thinking of gaining ownership of capital as depriving society of something. Philanthropy is redistribution, not a return of capital to society. The expression "giving back to society" makes sense only if the deprived or helpless people alone are society, the rest of us, well, Martians.

You might like to interpret "return to society" as an expression of gratitude to society which gave you the wealth. Then I'd propose to you that you've already amply done that while acquiring the wealth. I'm all for philanthropy but take issue with it being an atonement for the sin of accumulating wealth. Wealth creation is not a sin; it is an indispensable service to society. If you were a billionaire, unless you're also a drug kingpin, your billion is likely to have been earned by creating more than $10 billion worth of GDP. In most cases, far more. I am told that Mr. Gates is worth $100 billion and I look back and imagine a world without Microsoft. If MSDOS and Windows did not prevail and dominate, and a myriad of operating systems coexisted, the productivity of the whole world would've been negatively affected. It's well over 30 years since the birth of the personal computer, and the cumulative GDP since then would've been well over a quintillion dollars. Even a grossly underestimated half percent off that is $5 trillion. And Mr. Gates gets only a paltry $0.1 trillion. Poor Mr Gates.

Personally I have little aspiration to philanthropy. I believe whatever my capability and resources are best (meaning best for society) used to create wealth and let somebody else do the redistribution. I'm a creator, not a good redistributor. Both creation and redistribution contribute to society but not everyone is good at both.

It's become fashionable to say that companies must contribute to society besides seeking profit. It's like saying doctors must contribute to society besides curing people, which has to mean curing people is not contributing to society. Or in the case of a company, it is as if shareholders are not society, and enriching shareholders is not enriching society. Maximizing shareholder value IS serving society. There're far too many people, among them renowned economists, and even CEOs of Fortune 500 companies, insisting that profit seeking is milking or depriving society. This is economic illiteracy personified. Outside the communist world, the economic system collapses if profit seeking stops. Being a capitalist is a profession, just like being a doctor or fireman. The capitalist's job is to make profit, just like the doctor's job is to cure diseases, or the fireman's job to fight fires. The principle of Division of Labour prescribes that the best way to advance a society is to leave one to do what one does best free from distraction.

I was astonished recently by something called the Business Roundtable (BRT) statement. The BRT claims that until their recent statement they embraced "shareholder primacy." Nothing is further from the truth. Let us remember that among stakeholders, shareholders are ranked the bottom. Shareholders are never in a primacy position. And that's by law. The company has many contracts with many stakeholders. It has employment contracts, it has supply/service contracts, banking, insurance, you name it. It's also party to social contracts and moral contracts. It has to pay taxes, and conform to law, rules and regulations. Even in the absence of rules and laws, moral contracts stipulate that it must behave in a certain way, must contribute to a number of causes, to gain acceptance by the community they're in. The management of the company must first use its resources to serve all these stakeholders FIRST, must satisfy them FIRST. Only after all are satisfied, what's left over, if any at all, then goes to the shareholder. If nothing left, nothing goes to shareholders. Shareholders have been and always will be LAST, never never first.

Instead of dragging shareholder value into the argument, I'd recommend that BRT rephrase their statement around recalibrating their social and moral contracts with their stakeholders. What they should say is that they ought to recognize that they might have underperformed in their social and moral contracts with their stakeholders. Whatever the case, it has nothing to do with the shareholder value mission which should remain singular, paramount and untouched.

I have great difficulty comprehending this much vaunted, and increasingly fashionable idea called "stakeholder capitalism." It says a company should focus NOT ONLY on shareholders but must ALSO pay attention to stakeholders. Now that is complete humbug. I've never heard of one single company that is not focused on, or obsessed with its customers, employees, suppliers, etc., 24/7, far more than they ever think about their shareholders.

What's significant here is that obligations to stakeholders have an upper limit, as are with all contractual relationships, explicit or implied. And there's no such thing as "maximizing stakeholders' value." Stakeholders are to be contractually satisfied, not maximized. Whereas shareholders are insatiable. If a company's mission is defined as a pursuit of something infinite, then maximizing shareholder value is its one and only mission.

The quintessential P&L says just that. You expend your resources satisfying millions of contracts, commercial/social/moral contracts, and strive to leave something at the bottom, aptly called the bottom line. The solemn promise made at the point of receiving capital contribution from the shareholders, especially in the case of a company's IPO, is exactly that -I receive your money and I pledge to slog to maximise your return and I know you'll never be satisfied. But please note you're of the LAST priority, because I'll have to satisfy other stakeholders first. Now once again, how does it make sense to say 'We must ALSO pay attention to stakeholders'?

It seems nothing wrong with saying a company must also pay attention to stakeholders. Why of course it must. It's just that it's meaningless, inconsequential, and arguably harmful. It's as meaningless as proclaiming pompously that a company must ALSO pay employees, or a doctor must ALSO pay his suppliers. As if most companies usually don't intend to pay its employees. And by stressing this so much, and by bombastically calling it "stakeholder capitalism," it goes to dilute a company's sense of mission which is shareholder value. That sets the company aimlessly adrift.

The job of a capitalist is the pursuit of profits, and the pursuit of profits is an indispensable service to society. The most productive way for for-profit enterprises to serve the society is to be left alone to single-mindedly pursue profits.

Let me come back to capitalism as a political concept. Over the past century or so we've witnessed the Darwinian process among various economic systems, mainly capitalism and socialism. And clearly the survival of the fittest title goes to those that condone free competition and inequality. Those who dwelled on the noble idea of equality have fallen by the wayside. Left to competition, the constituents of capitalistic systems get fitter and fitter.

So does that mean that capitalism is the winning formula forever?

Let me put it to you that in a century or two, if we survive the climate change, capitalism as we know it will wane, and communism or centrally planned economies will make a comeback. A few developments make this possible and indeed inevitable.

Medical and genetic technologies will allow us to live so long, hundreds of years if not thousands, winning/achieving/being ahead will seem far less important and greed will subside. The same technologies will eliminate so much deviation among us that equality is far more likely. Production of goods and services will be so automated, consequently the output so abundant that hardly any of us need to labour for even things far beyond basic needs. Information collection/transmission/analytics will be so good, allocation of capital doesn't need competition to be optimized. Central planning and allocation will trump free competition. Consumer demands will be transmitted in real time to the allocation nerve center where allocation will be optimized and implemented in split seconds. Such allocations will also be made vastly easier by resources several orders more abundant than now. Money/currency will be a thing of history because there'll be no more trade as we know it. The evils of inequality will be gone. Utopia will finally arrive.

Why did communism failed? Such a noble, elegant idea. It failed because of largely three things: there was grossly inadequate information/data for central planning, production of goods and services was too labor-intensive, plus we were biologically too unequal. When these factors are undone largely by technology, communism will once again prevail.

So you see capitalism is not the gospel truth. It's at best a passing 400-500 year phase in human history, a puny 0.2% of homo sapiens' existence, during which for lack of information and for scarcity of resources, competition and attrition do the job of optimizing allocation of resources. It has brought immense good to humanity. But it is wasteful, and it is inherently evil/immoral, just like many wasteful and evil Darwinian processes in the biological world. But until the conditions for its obsolescence exist, which is unlikely to be within our lifetime, it is still the best there is (to paraphrase Churchill).

What's being attempted here is not an ode to capitalism. Capitalism is not forever. Capitalism is inherently imperfect, and at times evil. But at this stage of human development, this is the best there is. So let us not bash it. Let us regulate it, shape it, curb its evils, but make the best of it.