Reflections on Humane Capitalism

I was invited as a keynote speaker at the Humane Capitalism conclave in Gurgaon on 24th January 2009. I thought I'd reproduce my address to the conclave.

REFLECTIONS ON HUMANE CAPITALISM


When I was asked to speak at this conclave, I began thinking about the topic. I reflected on the meaning of Humane Capitalism. On Corporate Social Responsibility (CSR). And on what this means for society. I would like to present today, my reflections on Humane Capitalism, and some of the conclusions I drew from those reflections. I don’t believe that I will be saying anything new today. But I think that it is important to have a perspective on the topic of Humane Capitalism, if our discussion during the day is to lead to any useful conclusions.

To start with, I am going to strike a discordant note. I have a problem with the concept of CSR. For 4 reasons:

a) It is difficult to define
b) It includes the word responsibility
c) It includes the word social
d) It is associated with philanthropy and commitment to a cause or causes

Any concept that is difficult to define is open to interpretation and we see CSR being used variously as an image building, media targeted, empty tool by most organizations. There are a few who genuinely undertake CSR activities that are truly beneficial to society, but they are few and far between.

By talking about responsibility, the concept of CSR becomes forced. It becomes an obligation. Which is at variance with the concept of capitalism, as I will shortly explain. I have a similar problem with the inclusion of the word “social”. That term, too, is at odds with the nature of capitalism.

Finally, philanthropy and commitment to a cause are also concepts that go against the grain of capitalism. Because of these issues, I believe--and this is a personal belief--that CSR is doomed as a tool for promoting Humane Capitalism.

In order to understand the need for, and the meaning of Humane Capitalism, we need to first review what capitalism itself is all about. In The Wealth of Nations, Adam Smith stated that, by acting only in their self interest, individuals will create the greatest good for the greatest number. These atomistic decisions of countless individuals, each aimed at fulfilling their own self interests, come together to create the market forces of supply and demand, which drive the capitalist system.

Capitalism, then, is based not on social or collective action, but on individual interest and profit seeking.

By definition, capitalism implies a distinction between classes. Ownership of capital is limited. There is a class division between owners of capital and workers who provide their physical or intellectual labour or services, in return for wages. Recent innovations in capitalism, like shares for employees, do not change the basic nature of the beast. And even in cases where employees own large shareholdings, due to their part ownership of capital, their interests align with the owners of capital.

Now let us look at decision making in the capitalist system. The owners of capital decide the productive purposes for which capital is employed. The objective: maximizing profits for the owners of capital.

This brings us back to the point I made earlier: at the heart of capitalism lies individual interest and profit seeking; whether it is the individual decisions made by consumers of goods and services or the owners of capital who decide where capital should be employed.

In fact, Milton Friedman says, in The Social Responsibility of Business Is to Increase Profits, published in 1970:

“The only responsibility of individual corporations is to engage in activities designed to increase...profits.”

Now, what does this mean for society?

First, economic growth, and consequently, social welfare (at least to some extent), depends on how well the owners of capital do. If they do well, then there is, or at least should be, according to classical theories of capitalism, prosperity, employment and other benefits to society, to the other class that works for the owners of capital. If it does not, then, as we can see today, there is an adverse impact on society in general.

What this also means is, that government stimulus is, therefore, aimed at the owners of capital, though the intention is to benefit society at large.

The other conclusion which follows from this discussion is that capitalism essentially involves a very delicate balancing act. There is a natural instinct in capitalists, due to the profit maximization objective, to control costs, which includes wages, since that impacts profits. However, there is an inherent interest to ensure that wages do not drop to sub optimal levels as well. Because, if this happens, the wage earners reduce consumption, as can be seen around us today, and this also has an impact on profits.

Second, the conflicts and contradictions of the traditional capitalist system arise from the profit imperative. Conflicts such as the exploitation of the working classes, issues of ecological sustainability and social welfare, the trend towards automation which leads to fewer jobs and the fear of increasing unemployment; these are all driven by the need to maximize profits. In some sense, we could conclude that conflict is inherent in the traditional system of capitalism.

Third, profit contradicts need. Goods and services are not produced only on the basis of needs. They are produced for the benefit of those who can pay for them, since only then can the profit imperative be fulfilled. This naturally excludes a large portion of the world’s population, whose needs go unfulfilled simply because they do not have the purchasing power to back their needs.

Fourth, there is an implication for geographical development, since those locations are encouraged for development, which contribute to the maximization of profits. This has led to lopsided development.

Fifth, the competitiveness inherent in the capitalist system encourages innovation as a source of increased profits. However, this innovation is aimed at fulfilling the needs of that section of society which can pay for the innovation.

Finally, growth is critical for capitalism. Organizations need to grow constantly, to continue increasing revenue and profits. The pursuit of globalization and new markets, new products and increasing market share, all stem from the growth imperative, which is closely linked to the profit imperative. Of course, all growth has to be profitable, otherwise it is not worth pursuing. Again, this has an implication for markets, and consumers who may not be seen to be profitable and are therefore excluded from sharing the benefits of capitalism, either through satisfaction of their needs or through providing them with employment.

The basic issue, therefore, with the traditional concept of capitalism, is the fact that no one in the system looks at the big picture. Of course, government does, but the government is not strictly a player in classical capitalist theory. Governments have flirted with the concept of the welfare state; the USA in the ‘60s and ‘70s for example; but even that concept seems to have been abandoned now.

Clearly, there is a need for a holistic view. Quality of life, the environment and social welfare should be the key drivers that determine what is produced and developed and how it is distributed. But how is that to happen when the intrinsic nature of capitalism is individualistic and not collective or social? Market forces will never consider these drivers while seeking economic equilibrium. Is the answer, then, regulation? But doesn’t that begin treading the territory of socialism?

How, then does one implement Humane Capitalism? While I hope that this series of conclaves can throw up an answer, I’d like to venture some ideas.

Let me begin by quoting Bill Gates, at an address to Harvard graduates in June 2007:

“We can make market forces work better for the poor if we can develop a more creative capitalism – if we can stretch the reach of market forces so that more people can make a profit, or at least make a living, serving people who are suffering from the worst inequities. We also can press governments around the world to spend taxpayer money in ways that better reflect the values of the people who pay the taxes. If we can find approaches that meet the needs of the poor in ways that generate profits for business and votes for politicians, we will have found a sustainable way to reduce inequity in the world.”

I believe this quote addresses the key issues that lie at the core of the need for Humane Capitalism. These key issues should determine the scope of and method for implementing the concept of Humane Capitalism.

Humane Capitalism is necessarily social in nature, and is, therefore, at odds with traditional capitalism. So how do we go about guiding the evolution of capitalism to this higher state?

I see opportunities within the traditional capitalist system, which can be developed further to create a system that is more humane.

First, I have mentioned the contradiction between profit and need and the resultant focus on those with purchasing power. However, in the world we live in today, there are opportunities for owners of capital to successfully and profitably pursue consumers who would not have been included in the traditional definition of consumers with purchasing power. I am talking here about the “bottom of the pyramid” concept, which has been advocated by Prof C K Prahlad and others. There are organizations today who have profitably produced and distributed goods and services to the poorer sections of society. In India itself, rural marketing for traditional goods has begun to gain traction; the concept of micro finance has proved that the bottom of the pyramid is profitable. I see this as evidence of an opportunity that can be pursued further.

Second, the global economy has evolved in the last 200 years. From being an industrial economy, we have now become a knowledge economy. Innovation and intellectual capital are the keystones of this new economy. And, as I have said before, capitalism encourages, and thrives, on innovation. This is another opportunity for Humane Capitalism to establish itself. With new and innovative channels of distribution being created, it is now possible to reach larger populations at lower costs. What this means, therefore, is that there is an opportunity to cater to consumers who would have been neglected earlier; either because the cost of distribution was too high to be economically feasible, or because the profitability from these consumers was too low to justify the cost of distribution. With communication and distribution costs reducing, the profit imperative should drive customer acquisition strategies, which will increasingly encompass less privileged consumers, and, over time, help in equitable distribution of goods and services.

Finally, boardroom strategies have also evolved over the years. The keywords in past decades were: results and financial targets. Today, when I interact with CEOs, I hear more about process development, cooperation, knowledge sharing. While financial targets will always remain the mainstay of strategy, and indeed, capitalism, strategy today combines the softer aspects of business with hard economic reality. This, then, is another opportunity for humane capitalism. The importance of the environment and the opportunities to profit from environmentally friendly business operations with the technologies available or being developed today will reinforce this opportunity.

In conclusion, I believe that Humane Capitalism is an end that can be achieved, if business recognizes the opportunities available and pursues them. With technological developments and greater process efficiencies, there is no reason why the conflicts built into the traditional capitalist system, should endure. Quality of life, the environment and social welfare should, over time, become integrated into the system as drivers of business growth. All that is needed today, is for business to become aware of the opportunities, and utilize the resources available to pursue the objective of Humane Capitalism.