The Worldly Philosophers
“He who enlists a man’s mind wields a power even greater than the sword.” Heilbroner
Let’s start with an odd fact: humanity has struggled with economic problems long before the time of the Pharaohs. Over all of these centuries we have produced philosophers, scientists, political thinkers, historians, and artists by the score to help us comprehend life. But until Adam Smith in the mid-1700s, there were no economists. Why?
After all, an economist “embraces in a scheme of philosophy, the most-worldly of all our activities – the drive for wealth”. The main answer to this oddity is that prior to the 1700s, an economist was simply unnecessary, as the drive for wealth was not ubiquitous.
The survival of mankind has always been about our struggles between self-centredness and co-operation. We survive, not as an individual, but as a member of a social group. As surprising as it may seem, possibly the most important tool in our armoury for survival has been our ability to convince the poor to remain content being poor.
Over the centuries this had been done by organising society around command, tradition and caste. In the feudal command system, no one person was able to question the higher authority and ownership was debatable. Tradition and the caste system were all about copying what your family did and accepting your lot in life. So long as society’s problems could be handled by command and tradition, it never gave rise to the special field of study called economics. Even the role of religion, pervasive throughout society, helped to maintain the status quo and comfort the poor in their wretchedness.
This way of the world changed around the 1700s. In economic terms, it was the separation of the factors of production into land, labour, and capital. The creation of the “market system” did not happen overnight. In fact, it took centuries and was born mostly out of agony. At every stage along the way vested interests were protecting themselves. The UK wool trade of the 1500s led to the enclosures of public land for sheep and this had the effect of creating in one fell swoop both private property and free labour, after farm workers had been displaced. The UK Corn Laws of 1815-45 saw some of the biggest fighting between land, labour, and capital over who benefited from the price of grain, showing how these new factors of production were asserting themselves. The Italian Renaissance played a big role too, laying the foundations for capitalism with credit and banking, while even the feudal age inadvertently promoted commerce with the development of towns, roads, and markets.
The new game, called the “market system”, had deceptively simple rules: each should do what was to their best monetary advantage. These new rules would ensure that the needs of the individual and the social group were collectively met. It was this new, paradoxical and difficult solution to the problem of survival that called forth the economists. It was these new worldly philosophers who would seek to explain the puzzle.
Locke and Steuart were some of the first of the economists, arriving on the scene around 1750. It was in fact, Steuart who coined the phrase “supply and demand” back in 1767. But it was Adam Smith who is the consummate Godfather of Mr Market. In his 1776 book “The Wealth of Nations” he described a democratic philosophy of wealth for all people in a society, involving the flows of goods and services and their consumption. He worked out that in a society where land, labour and capital were unique units of value, self-interest drove people forward and competition regulated the exploitation of the consumer. Freedom and hope now replaced command, tradition, and caste as the tools used to persuade the poor to be content being poor.
The march from 1750 towards the capitalism of today has been iterative. Along the way, we have been guided and influenced by this growing band of new worldly philosophers – our economists. After Smith came Malthus, Ricardo, Owen, Mill, Marx, Engels, Schumpeter, Edgeworth, Veblen, Keynes, Friedman and many more. Each one picking up on the problems capitalism was creating for the various stakeholders in society and trying to provide solutions.
Malthus’s focus on sustainable population growth and agricultural resources introduced the environment as a new stakeholder. Mill pointed out that capitalism lacked moral judgement and was not able to deliver the desired outcome for society. Edgeworth, a mathematician, put a new spin on utility preference, by assuming humans were pleasure mechanisms competing for society’s stock of pleasure. Veblen in his “Theory of the Leisure Class”, didn’t like the fact that the world’s consumers were no longer its producers, while Keynes thought capitalism could and should be directed by governments. Marx and Schumpeter both believed that capitalism was doomed. Marx via revolution and Schumpeter by the natural descent towards socialism, as voters would demand governments wrap controls around the system.
These were all men of courage who risked their fame to implement new ideas and dared to innovate in the hope of improving the system. Through these men, there is no doubt capitalism has become a different sort of system to that described by Smith back in 1776. His “commercial” capitalism has morphed into what Schumpeter labelled “liberal capitalism”.
“I don’t think I’m making anyone very happy. Of course, nobody’s making me very happy either. Somebody’s not doing their job” Lucy, Peanuts
Capitalism has always involved stakeholders because it was born out of the freedom and cohabitation of the factors of production, but whilst it was supposed to be efficient in theory, in practice it wasn’t. Adam Smith called his capitalism “commercial”, and his message was one of optimism. But what arose from this was one of the horrors of the age – the factory. Surely there is no other human creation that has simultaneously brought such prosperity and misery to mankind outside of war. A metaphor perhaps for the battles that raged and still rage in the new era of capitalism, between self-centredness and co-operation.
In amongst all this there has also been the added pressure to these problems from population growth. The World has always been considered overpopulated. Even Zeus complained about this when he sent Helen to provoke a war, such that “death might empty the World”. But during the Industrial Revolution, life expectancy started to rise and growth rates, having never risen above 0.5%, doubled after 1750.
If one were to be critical about today’s “stakeholder” capitalism, we can say it is just another manifestation of the struggles we have seen throughout the centuries between the haves and have nots. If we want to be constructive, it must lead to something new and additive.
The origins of modern stakeholder capitalism, as we refer to it today, probably go back to the 1960s. As the US emerged out of WW2 in the 1950s and 1960s, “stakeholder management” was very much de rigueur in the corporate world. The word “stakeholder” in this context first appeared in a Stanford Research Institute memo in 1963. Then, in 1983 Freeman published “Stockholders and Stakeholders: A new perspective on corporate governance”, that tried to make sense of this movement. Interestingly, he cited several cultural factors that were giving this concept a boost at the time – civil rights, anti-war, consumerism, environmentalism, and women’s rights. With many similarities between the youth culture of the 1960s & 1970s and today’s diversity and inclusivity, it is no surprise to see “stakeholder” capitalism high up on society’s agenda once more.
Critics, and there are many, such as Friedman and Blattberg, suggest stakeholder capitalism is fine in principle, but unworkable in practice. The US corporate sector eventually gave up on this mantra in the 1980s and the term “garbage can management” was used to refer to the chaotic reality of organisational decision making that came from having to serve disparate stakeholders. The problem was a simple one – who takes priority? And there was no answer. Organisations couldn’t make up their minds and managers just focused on the administration of companies rather than decision making. This arrested progress.
For “stakeholder” capitalism to make a lasting return, it can’t make the same mistake. If we look at the different relationships that a company has with its stakeholders, we might learn something useful. There are three crude powers. First, voting power – the owners; second, economic power – the customers, employees, and suppliers; and third, political power – government, regulators, trade associations, pressure groups and independent directors. All of these will influence the governance of a corporation, but in different ways and modern “stakeholder” capitalism must reflect this.
Some powers must be governed by rules and others by principles. Rules, being mandatory, might sound better. However, standards to ensure compliance follow the lowest common denominator, to allow society a chance to pass. This is not where innovation and change take place. Principles on the other hand, whilst not law, have been chosen by the signed-up members. This gives them much more flexibility and those at the vanguard of change can set high standards and use these to exert more effective political power.
We have experienced this in our own way as a certified B Corporation. “B Corps” are businesses that meet the highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose. They sign up to a principles-based declaration that has at its heart a commitment to consider all stakeholders in the running of businesses, not just shareholders. Such an approach allows B Corps to evolve and improve their approach as the environment around businesses changes, as it inevitably does.
Stakeholder capitalism needs this flexibility to adapt itself for different circumstances and for people’s different opinions. A legislative approach will be necessary for voting power and economic power, as this is all about static compliance. But for political power and social contracts, the principles approach to governance carries more merit. Above all else it focuses on continuous improvement to higher standards.
Today this is where “stakeholder” capitalism sits and it looks good for it. We must not believe it is a panacea to the World’s ills, but that it is a transitory device for change. We must use it as a force for improvement in the quality of our corporate governance, to make sure we are travelling down the road towards Mill’s vision of a better “moral judgement” for capitalism.