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If you are a manager of an organization, whether business, government or non-profit, you currently have a hand in managing capitalism. In a very real sense, you are the visible hand of managerial capitalism. Free market capitalism is long gone. Adam Smith’s invisible hand of market forces is largely absent today, except where commodities are traded. Most transactions are cleared within firms at managed prices without haggling in a free market. I am sorry if that does not correspond with your world view, but let me explain how we got here and where we need to go next.

If you have been paying attention in recent years, you may have noticed public dissatisfaction with what modern capitalism has become, particularly as enacted by large public companies that continually chase quarterly profits and resort to layoffs at the first sign of trouble. The tired refrain about “the market made me do it” is about as believable these days as “the dog ate my homework.” According to a Harvard University survey, half of 18- to 29-year-olds in America say they do not support capitalism (Ehrenfreund 2016). It has saddled many with student debt, high housing costs, low wages, and poor prospects going forward. Capitalism’s flaws are likely to be highlighted more prominently these days than its positive attributes.

Of course, young people’s attitudes toward capitalism may differ depending on the attributes and life experiences they associate it with. If they grew up in households where their parents were enmeshed in a 9-5 daily work routine in return for low compensation, they may associate capitalism with an all-consuming treadmill. On the other hand, if they grew up in households where their parents were highly-educated and highly-compensated professionals, they may aspire to start and grow new enterprises, associating capitalism with a new frontier. It depends on their lived experience and their resulting narrative.

While narratives are simply stories, they can powerfully shape the way people behave with respect to the future. Narratives have an ability to attract, and become attractors to specific viewpoints, within the complex adaptive system that is capitalism. A positive narrative can give us a sense of purpose and the ability to connect our own behaviors with the larger goals of society. When we feel that we are part of a larger purpose – helping not only customers, but our fellow man in a larger sense – we have a greater social connection with each other, with society, and with the organizations where we work.

Discussions of capitalism, pro and con, often concentrate on economic thought. The ideas of well-known economists like Adam Smith, John Maynard Keynes, Friedrich August Hayek, and Milton Friedman come to mind. Some argue that capitalism took a wrong turn in the 1970’s & 1980’s. Milton Friedman (now deceased former economist at the Chicago School of Economics and a big fan of agency theory) wrote a famous 1970 article in the New York Times Magazine, stating that “the social responsibility of business is to increase its profits.” As we entered the 1980s (the Reagan years in the USA), the federal government was labeled as ‘the problem’ rather than a source of solutions, and in public companies, agency theory elevated shareholder value maximization to the prime directive. Compliant boards helped incentivize CEOs to do just that. They replaced the retain and invest model that they had lived by for decades, with a new downsize and distribute model that emphasized efficiency (Lazonick, 2014). Yet it is not dead economists that keep capitalism from a needed rebirth; it is our inability to articulate and enact a better vision of what capitalism can become. It is C-suite executives and other managers who enact capitalism daily through their beliefs and actions.

Consider capitalism’s lack of virtue. If you are in business, your goals and values are likely suspect within the public’s eyes — for good reason. There are numerous examples of businesses that have strayed to the dark side by embodying negative values in various forms and destroying public trust — including Enron, WorldCom, Volkswagen, Wells Fargo, Toshiba, and Bernard Madoff Investment Securities LLC. Several organizations have appeared to be paragons of performance, riding high before their scandal, and whose names seemed to be synonymous with some form of greatness; but these same organizations were brought low by one or more people within the organization that behaved in non-virtuous ways. It seems that organizations are often unprepared to hold internal agents accountable to a common set of positive values until it is too late. To instill virtue, organizations need to be intentional about it.

Still, problems with capitalism are larger than any real or imagined problems with bad actors. Instead, capitalism’s underlying mechanisms and components should be called into question as we move further into the 21st Century. Definitions of capitalism typically note that: (1) it is an economic system, (2) it is based on private ownership of the means of production, (3) prices, production, and distribution are determined by competition in free markets, and (4) the goal is profit. Today, all four parts of this definition are largely obsolete.

Part one of the definition: capitalism as an economic system. On a macro level, an economic system is a way in which market participants (or actors) allocate resources and organize the production and distribution of goods and services within an economy. Capitalism has historically set itself apart from communism, for instance, because it balances supply and demand through the pricing mechanism of markets, while communism historically emphasized a command economy, more reliant upon central planning. Now, in the 21st Century, this distinction has been blurred as both capitalist and communist economies have evolved their forms, not to mention that they now actively trade with each other (the USA and China being notable examples). Socialism (another historical category), reflects something of a middle way between the two extremes, emphasizing a stronger social safety net more than anything else, without a major departure from capitalism (e.g., in Europe).

We limit the potential of capitalism if it is simply an economic system; today it is more accurate to think of it as an economic and social system involving a variety of benefit exchanges, tangible and intangible, between intentional actors. This view better captures the realities of the non-profit and government sectors, in addition to being applicable to business.

Part two of the legacy definition: capitalism has historically involved private ownership of the means of production. Since the early years of the industrial revolution, capitalism has been synonymous with capital investments in the equipment and technologies that make manual workers more productive. Frederick Winslow Taylor’s task management ideas come to mind, from the early 1900’s, as well as Henry Ford’s assembly line. More recently, however, as manual work has given way to knowledge work, the means of production are centered around technologies and bodies of knowledge which have been created and continuously evolve through investments by both private and public entities. Thus, in modern capitalism, the means of production is increasingly being owned and shared by both private and public actors.

In part three of the definition of capitalism, prices, production, and distribution were historically associated with competition in free markets. Now 250 years downstream from Adam Smith’s mention of the invisible hand (Smith, A. [1776] 2005), this view is no longer accurate. The reason firms exist, and the reason why some have grown to large size is that they take transactions out of the free market and execute them more efficiently through their own internal processes (Ronald Coase, 1937). For instance, if only market mechanisms were available, customers would have to go to the market every time they wanted to conduct a transaction, thereby incurring information and negotiation costs as well as delay, placing a restraint on what could be accomplished in a timely way. Today, the friction of rowdy free markets where buyers and sellers haggle over the price (without barriers to entry), has been replaced by management decision making within organizations, and we now have managerial capitalism rather than free-market capitalism (Alfred Chandler, 1977). Even online platforms have not changed this reality; if you want to sell a book on Amazon, you must play by their rules. Only where commodities are traded today do markets approach the free markets originally associated with capitalism.

Yet something else is going on in today’s world, and it means that price is not necessarily the best way to discover demand. Other types of benefits are being exchanged that are not captured in the financial price of a good or service. Consider the following example. If I go to a big box store and buy a lawnmower, I will provide financial benefits to the retailer in exchange for the economic benefits I receive by using the mower over time. It is one of the fruits of capitalism that I become more productive if I invest in equipment to make the job easier. In buying a lawn mower, I am betting that the economic benefits I receive by using it over time are greater than the financial costs that I will incur in the purchase. But that’s not all that motivates the exchange, because there are likely to be social and psychological, as well as environmental benefits associated with this, and many other activities. While mowing my lawn I can receive social benefits through positive interactions with my neighbors, as I come to be known as a useful and productive member of the community. I may also accrue psychological benefits for myself while mowing if I gain self-esteem. Environmental benefits (serving the common good) can also come into play as I help to create a better neighborhood in which to live. The motivation to buy a lawnmower (or anything else) can have several dimensions. Capitalism is not about the economic or financial calculus alone. It is also about other benefits that encourage and motivate a purchase. ‘Good’ capitalism can gain strength and reveal its hidden potential when a rich array of benefits is considered to motivate every exchange.

Part four of the legacy definition: The goal is profit. Those who argue that capitalism is about profit often point to Adam Smith’s 1776 book, Wealth of Nations, where he notes that “it is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest.” Generations have taken Smith’s words to mean that the purpose of a firm is to satisfy private interests and maximize profit, but this view only serves as a shiny object that diverts our attention and should not be the main conclusion. It is more important to realize that neither the butcher, the brewer, nor the baker would be in business for long if their purposes did not serve the interests and needs of society. Smith notes in a later passage that “the butcher, the brewer, and the baker… together with many other artificers and retailers necessary or useful for supplying their occasional wants…contribute still further to augment the town. The inhabitants of the town, and those of the country, are mutually the servants of one another” (Smith, A. [1776] 2005, 309).

The goal of a firm is not profit; the customer is not willing to pay more to ensure that a firm achieves it. Rather, a customer is paying for the firm to deliver benefits to them. If the financial revenue that the firm receives in return for those benefits exceeds the costs, a surplus (or profit in business) is created. Customers are external actors and adopt a firm’s offerings to accrue financial, economic, social, psychological, spiritual, or environmental benefits for themselves. Such benefits accrue to society (and the environment) as a whole since external actors are a part of society. Thus, the purpose of a firm is not to satisfy private interests nor to maximize profits, but rather to create, amplify, and channel benefits in society so that the firm can receive benefits due to it in return. Overall, capitalism is meant to serve the common good rather than generate profit (or surplus) for individual actors.

Given what we have discussed here, a more accurate definition of modern capitalism can be envisioned going forward, such as: (1) it is an economic and social system involving a variety of benefit exchanges, tangible and intangible, between intentional actors, (2) where the means of production (technologies and knowledge) are owned and widely shared by private and public entities, (3) prices, production and distribution are managed within organizations based on observed demand-side responses to their offerings, and (4) the goal is effective service to, and maintenance of, the common good.

Since today’s managerial capitalism has largely displaced Adam Smith’s free market capitalism, we are all managing capitalism now. To improve our performance in this role, we need to incorporate a better system of management that is designed to serve the common good. Under a new vision of capitalism, small and large organizations alike (whether business, government or nonprofit) would serve their environment and be rewarded in return, thus managing capitalism for the common good. An organization is either part of the solution or part of the problem. It will not be possible to solve the myriad problems that society now faces without a new conceptualization of capitalism, together with the creation of truly great organizations that work to bring it about.

For more ideas on managing capitalism for the common good, pick-up a copy of my 2017 book, Become Truly Great: Serve the Common Good through Management by Positive Organizational Effectiveness.

Charles G. Chandler, Ph.D.

References:

Ehrenfreund, Max. 2016. “A majority of millennials now reject capitalism, poll shows.” Washington Post, April 26.

Friedman, Milton. 1970. “The Social Responsibility of Business is to Increase Its Profits.” New York Times Magazine, September 13.

Lazonick, W. 2014. “Profits Without Prosperity.” Harvard Business Review, September 2014, online ed.

Smith, Adam. [1776] 2005. An inquiry into the nature and causes of the Wealth of Nations. 2005 edition, An Electronics Classics Series Publication. State College, PA: Pennsylvania State University.

Coase, Ronald. 1937. “The Nature of the Firm.” Economica 4 (16): 386-405.

Chandler, Alfred D. (Jr.). 1977. The Visible Hand: The Managerial Revolution in American Business. Cambridge, MA: Belknap Press, 8.

Chandler, Charles G. 2017. Become Truly Great: Serve the common good through Management by Positive Organizational Effectiveness. Powell, OH: Author Academy Elite.