Stakeholder Capitalism Notes

Stakeholder Capitalism

Abstract

• This article outlines the principles of stakeholder capitalism and how it contrasts with traditional capitalism.
• Traditional capitalism assumes:
  • Competition
  • Limited resources
  • Winner-take-all mentality
• These assumptions lead to:
  • Limited ethical analysis
  • Simplistic view of human beings
  • Focus on value-capture rather than value-creation
• The article proposes reframing capitalism around stakeholders, value creation, and trade.

Introduction

• Markets have immense power for organizing society and creating value.
• The last 200 years have seen significant innovation and progress due to markets.
  • Industrial revolution
  • Rise of consumerism
  • Global marketplace
• However, markets and capitalism have also:
  • Increased the divide between rich and poor.
  • Led to harmful consequences like environmental degradation and inequitable opportunities.
• Global issues like global warming, financial crises, and terrorism threaten the world.
• The article presents five contemporary narratives of capitalism, each privileging one group over others.
• These narratives assume:
  • Market participants are naively self-interested.
  • Morality is separate from prosperity.
  • Competition for limited resources is the dominant mode.
• The article argues that these assumptions are connected to both the progress and the problems of capitalism.
• Current conversations focus on enforcement mechanisms (institutions, legal structures) to solve the consequences of markets.
• The article emphasizes that the way we talk about markets and value creation impacts outcomes.
• Stakeholder capitalism is presented as a way to resolve tensions within capitalism and foster innovation.

Narratives of Capitalism

• Five contemporary narratives of capitalism are examined:
  • Labor
  • Government
  • Investor
  • Managerial
  • Entrepreneurial
• Each narrative focuses on value creation and trade from the perspective of one stakeholder.

Labor Capitalism

• Rooted in the writings of Marx and Engels.
• Capitalism is tied to class division between capitalists (bourgeoisie) and laborers (proletariat).
• The proletariat must sell their labor to the bourgeoisie for subsistence.
• This labor market is inherently fraught with tension due to opposing interests.
• Marx and Engels view the interests of the laborer as dominant.
• Engels stated:
  • To say that ‘‘the worker has an interest in the rapid growth of capital’’ means only this: that the more speedily the worker augments the wealth of the capitalist, the larger will be the crumbs which fall to him, the greater will be the number of workers that can be called into existence, the more can the mass of slaves dependant upon capital be increased. (Marx and Engels, 1847)
• Ethics and moral language are obscured in this view.
• Marxists view morality as a form of ideology reflecting class interests.
• The Marxist version depicts labor and capital fighting over fixed resources.
• Economic activity is amoral, and the solution is for labor to take control of productive assets by force.

Government Capitalism

• Associated with John Maynard Keynes.

• Keynes focused on the stability of national unemployment rates.

• He shifted economic thought to a macro view, emphasizing national income and employment.

• Keynes believed capitalism could and should be managed by the government.

• Government capitalism sees the government's rights as dominating the needs of other stakeholders.

• Keynesian economics posits that capitalism without government intervention would lead society astray.

• Keynes viewed a love of money as a disgusting morbidity.

• The metaphor is of a garden where government is the gardener, keeping capitalism's powers in check.

• Keynes' view was influenced by moral philosopher G. E. Moore, who viewed certain mental states as morally good.

• Ethics is imposed by government through economic policies to regulate a system seen as actively leading society astray from the good.

• Keynes believed that:

  • I think that capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight, but that in itself it is in many ways extremely objectionable. Our problem is to work out a social organization which shall be as efficient as possible without offending our notions of a satisfactory way of life (Romano and Leiman, 1970).

• The welfare state is a descendant of Keynes' vision.

• Many today echo Keynes' distrust of capitalism and faith in government.

Investor Capitalism

• Advocated by Milton Friedman, who called for a return to laissez-faire economic policies.

• Economic freedom is central, particularly for shareholders.

• Government's role is limited to:

  • Eliminating monopolies
  • Reforming tax laws in favor of corporations
  • Maintaining civil law and order

• Friedman focuses on investors as the dominant group.

• Commercial business activity has one specific purpose:

  • ‘‘to use its resources and engage in activities designed to increase its profits, so as it stays within the rules of the game, which is to say, engages in free and open competition, without deception or fraud (Friedman, 1962).

• Shareholders' interests are assumed to be in competition with other stakeholders.

• Friedman views the inner workings of capitalism as amoral.

• Ethics is a side constraint, with managers expected to refrain from fraud and deception.

• The purpose of capitalism is to increase wealth for the investor.

• Consideration for other stakeholders is seen as diverting resources.

• Investor capitalism sees the investor as the primary engine for economic growth.

Managerial Capitalism

• Differentiates managers from investors and other stakeholders.

• Berle and Means see traditional economic theory as inadequate in handling the differentiated roles between ownership and control.

• Control lies in the hands of management, capable of perpetuating its own position.

• Managers are separate from other stakeholders, including investors.

• Agency theory posits managers as agents of stockholders with a fiduciary duty to shareholder interests.

• Managerial capitalism's view on business ethics is complicated.

  • ‘‘Neither the claims of ownership nor those of control can stand against the paramount interests of the community (Berle and Means, 1932).

• Business is considered amoral, with a reconciliation to morality required.

• Marris argues that managers have growth and productivity as primary goals.

• Marris' view outlines the financial motivations of managers but finds the rules of the game open and flexible.

Entrepreneurial Capitalism

• Emphasizes the role of the entrepreneur as the epitome of value creation.

• Economists like Schumpeter, Kirzner, and Baumol highlight the entrepreneur's role.

• The entrepreneur is the lifeblood of capitalism.

  • ‘‘thoroughly and profoundly shapes and determines economic phenomenon (Kirzner, 1985).

• Schumpeter argues that the entrepreneur is in the process of creative destruction.

• Kirzner focuses on a more positive vision of capitalism within the Austrian tradition.

• This narration leaves open the possibility of a strong role for business ethics.

• Entrepreneurs are distinct from capitalists, property owners, managers, and laborers.

• The entrepreneur is the agitator who leads all others out of the status quo.

Problems with Traditional Narratives

• All five narratives make similar counterproductive assumptions:
  • Market participants have a naive version of self-interest.
  • Morality is separate from economic prosperity.
  • Competition for limited resources is the dominant mode.
• These assumptions create four problems:
  • Competition
  • Business ethics
  • Dominant group
  • Business in a liberal democracy

The Problem of Competition

• Pitting individuals against each other fosters competition as a prerequisite to capitalist society.
• Others are seen as threats rather than partners.
• This focus neglects collaboration necessary for survival.
• Entrepreneurs rely on non-competitive stakeholder relationships.
• Value-creation can emerge from joint resolution rather than a single winner.
• Mutually beneficial trade creates more value than dominance.
• Porter's Five Forces analysis exemplifies this focus on competition.
• A good relationship with supply chain partners can be a competitive advantage.

The Problem of Business Ethics

• Assuming individuals are in constant survival mode limits the role of ethics.

• Managers are mistakenly taught that business is amoral.

• The traditional models separate capitalism from ethics by emphasizing competition and autonomy.

  • The Separation Fallacy is described by Freeman (1994):
    • The discourse of business and the discourse of ethics can be separated so that sentences like, ‘‘x is a business decision’’ have no moral content, and ‘x is a moral decision’ have no business content.

• Arguments against morality ignore that moral concepts are necessary for survival.

• The Separation Fallacy is evidenced by the phrase