Rethinking capitalism: challenges and possibilities.
The catastrophic consequences of the current financial crisis and its dramatic rapid engulfing of the world have induced experts, within the capitalistic camp, to rethink their assumptions and challenge certain economic pillars. Indeed, at least three major voices within the proponents of the free market economy have emerged. There are those who believe that corruption and deficiencies are embodied in capitalism itself and that either there is nothing that can be done about it or vigorous regulatory mechanisms must be put in place to deter or punish wrongdoing. Gordon Brown (2009), Britain's Prime Minister, vividly expressed this opinion stating, "As we have discovered to our cost, the problem of unbridled free markets in an unsupervised marketplace is that they can reduce all relationships to transactions, all motivations to self-interest, all sense of value to consumer choice and all sense of worth to a price tag."
Others question the ability of capitalism to cope with emerging challenges resulting from globalization, fierce competition, and the complexity of a larger market. Those voices, including Alan Greenspan's, seem to imply that there is a need for revolutionary changes in the fundamentals of capitalism. That is, the principles of a free market may sound fine but in practice and in a complex world they lead not only to wide-spread deception but to outcomes which are inherently contradictory to their primary assumptions. The third stream of thought calls for a new partnership between government and the private sector. The nationalization of banks and other financial institutions which took place, for example, in the U.S. and Britain in late 2008 and the infusion of huge public funds in an ailing economy and in institutions are just the beginning of this trend. The advocates of this approach underscore the severity of the crisis and suggest that nationalization is a short-term strategy and by no means a substitute for a vital and fruitful cooperation between the state and the private sector.
The validity of any of the mentioned approaches is impossible to verify without applications. Nevertheless, it is certain that these approaches, despite their sound perspectives, ignore one fact; capitalism and socialism systems, in their variations, have all produced outcomes contrary to their professed intentions, and in practice both systems have led to disappointments, be they inefficient distribution of wealth, concentration and abuse of power, limited access to opportunities, or thriving corruption and fraud. Worse, in many situations, like in Russia, Indonesia, Thailand, and some democracies, this has led to the emergence of powerful groups who have influence and can pull strings; the oligarchs (Johnson, 2009).
Handy (1999) rightly recognized that under both capitalism and socialism there is always uncertainty. He argued that socialism has a 'heart' but lacks mechanism, while capitalism has mechanism but lacks purpose. This proposition, though controversial, has its merit. Proponents of both systems claim that their corresponding system optimally serves mankind and provides workable mechanisms for allocation of resources. Do these claims practically produce fruitful results? For example, the primary objective under socialism is to reduce inequality. Undoubtedly, socialism offers a degree of economic security to the public but it severely limits opportunities. Furthermore, in the Soviet Union and its allies in Eastern Europe, the practice of socialism has led to the concentration of power in the hands of a few bureaucrats and technocrats and eventually stifled creativity and limited possibilities. The end results have been corruption and a stagnant economy.
Similarly, supporters of capitalism argue that the system's primary objective is to provide a wider access to economic opportunities. More likely, this claim is true. Nevertheless, capitalism does not regulate the desires and selfish pursuits of certain parties. Likewise, it leads to the concentration of wealth and power in the hand of a few. These two aspects inevitably result in fraud and widespread income inequalities. That is, like socialism, capitalism has its own minefields and because of the diversity and complexity of market players, the destructive forces tend to have a far reaching impact leaving the rich in a state of bewilderment and the poor in acute misery and chaos.
Unlike socialism, capitalism is founded on highly articulated and well promoted propositions. The validity of these propositions is often taken for granted. These assumptions are:
1. Maximizing profit is the primary motivation for investors and is the ultimate goal of business corporations,
2. Profit maximization is the foundation for growth,
3. Corporations efficiently regulate themselves,
4. Unfettered competition at home and widespread markets are necessary for capitalism to spread its fruitions,
5. CEOs know what is best for shareholders and the society, and
6. Morality is a personal matter that must be judged exclusively by self interests
The above assumptions have been espoused by managers and are invariably held by capitalism proponents in every quarter of the world. The expressed purpose of business organizations and that of CEOs, however, is to a great degree narrow and is not linked to the broader societal goals or welfare. Furthermore, since the early 1980s, a new thinking, which emerged in the U.S., has dominated the market scene. This new thinking advances that there is a conflict between:
a. Profitability and responsible conduct,
b. Customers' and employees' interests,
c. Efficiency and commitment to the society, and
d. Societal goals and growth.
Furthermore, this emerging thinking has aggressively projected the new brand of capitalism as the "Savior" of humanity and that salvation is possible only through the selfish pursuit of goals. That is, capitalism is the only "system that fully allows and encourages the virtues necessary for human life" (Tracinski, 2002). And that human liberty is closely linked to executives' bonuses. Any restrictions on bonuses and salary are an attack on private property rights and the freedom to act. This is well reflected in Capitalism Magazine's (February 4, 2009) article entitled, "As Wall Street Bonuses Go, So Goes the Liberty of All of Us."
In treating capitalism as a divine system which is suitable for every era and culture, the possibility for variation, adaptation, and innovativeness is denied. Perhaps, such belief has led to the creation of an environment where societal interests are not only overlooked but ridiculed and responsibility is projected as an unnecessary burden that hinders CEOs from pursuing their goals efficiently and freely. During this era, the 1980s and the years that followed, selfish and unfettered pursuit of interests, rapid deregulations, and good news were celebrated and questionable practices were tolerated. Consequently, these beliefs were rarely scrutinized and eventually found their ways into corporate boardrooms and business schools across the globe. More likely, acting upon these beliefs is a threat to the vitality and continuity of social and economic institutions. Indeed, events since the late twentieth century demonstrate that these premises are false and that a blind pursuit of them has led to widespread suffering and hardship and endangered the worth of economic institutions.
Are these beliefs sound? Are they necessary for revitalization of capitalism? Enlightened capitalists such as Charles Handy and George Soros, among others, have vehemently rejected such beliefs and have consistently refuted their premise. In fact, Handy (1999) asserted that individuals and organizations must have a purpose beyond the self, stating that "if the purpose is only for you, it rapidly dissipates." This proposition should be examined in the context of Joseph Schumpeter's 1942 controversial question and his own brief answer, "Can capitalism survive? No. I do not think it can." Any debate of Schumpeter's requires a counter question, "Are there possibilities for saving capitalism?" To answer the latter, there is a need to keep in perspective that capitalism is a man-made system which like any other similar system has its flaws and strengths. These differ according to time and place. More importantly, they can be contained, minimized/ optimized, and improved once they are addressed in the context of emerging and evolving challenges.
Certainly, Handy's proposition offers a broad guiding principle in the search for minimizing flaws in capitalism and the avoidance of potential difficulties. Indeed, the unfolding economic crisis demonstrates that individuals and organizations, alike, in order to be responsible actors, have no alternative but to devise a purpose much broader than selfish interests and increasing the owners' wealth. In 2000, we called for aligning corporate and societal interests. This was based on the assumption that a firm exists to satisfy societal needs and that its vitality derives primarily from optimally serving the society. In a free market economy, this must top the list of corporation's priorities. Later, in 2006, we proposed that there must be no dichotomy between competitiveness of the firm and its societal non-economic role, profit motive and human dignity, and between customers and employees. That is, corporations as economic, social, and political actors, have to strike a balance between their market and social responsibilities. These must not be viewed as independent and unrelated activities. In fact, there is an increasing awareness that business and societal issues are highly interwoven and should not be treated separately and that globalization benefits and responsibilities go hand in hand. Therefore, safeguarding human dignity and protecting the environment while pursuing economic activities becomes a strategic concern for corporations which seek to position themselves as competitive and responsible organizations.
In "Rethinking Competition," we underscored the need for corporations to be flexible and adaptive to emerging circumstances, and that senior managers must understand that in today's world moral clarity and individual responsibility toward society and the organization are instrumental in minimizing deception and corporate fraud. This is possible only when individuals and corporations look beyond their immediate interests and closely align economic activities with societal goals. Perhaps this broader role and purpose could give firms and their senior executives a requisite kind of flexibility and transparency, strengthen their sense of self, and safeguard against market temptations, be they monopoly, deception, or breaking laws and regulations.
In his Inaugural Address, President Obama stated that there is a need for a new era of responsibility where, "a recognition on the part of every American that we have duties to ourselves, our nation and the world; duties that we do not grudgingly accept, but rather seize gladly, firm in the knowledge that there is nothing so satisfying to the spirit, so defining of our character than giving our all to a difficult task." Furthermore, in his 2009 budget proposal, Obama articulated his message of responsibility stating:
This crisis is neither the result of a normal turn of the business cycle nor an accident of history. We arrived at this point as a result of an era of profound irresponsibility that engulfed both private and public institutions from some of our largest companies' executive suites to the seats of power in Washington, D.C. For decades, too many on Wall Street threw caution to the wind, chased profits with blind optimism and little regard for serious risk-sand with even less regard for the public good.
Obama appears to challenge organizations and individuals to espouse a wider goal, assume responsibility, shun temptations, and create a bright future; a future where entitlements and obligations go hand in hand and civic duties compliment business operations. More importantly, Obama sends a clear message that the free market economy is capable of renewal and that private organizations are instrumental in meeting emerging economic and social challenges.
Responsibility implies aspiration and commitment. That is, responsibility has pragmatic and purposeful (spiritual driven conduct) dimensions. The pragmatic aspects include, among others, the courage to confront wrongdoings, being transparent, mapping and pondering possibilities, meeting obligations and promises, guarding societal interests while promoting those of the organization, and viewing social actors and government as partners rather than rivals. Pragmatism does not overlook the fact that in a free market economy wishful thinking and opportunism are abound. These, however, if are not managed, are destined to endanger the vitality of the market and its institutions.
The Purposeful Conduct (Spiritually Driven Conduct) places emphasis on self confidence, optimism, moral clarity, transparency, and a belief that the future is promising. Both dimensions underscore that neither individuals nor organizations exist independent of the society, that what happens in life is one's own making, and that salvation is possible through cultivation of virtues. Taken together, these two dimensions of responsibility provide the best hope for safeguarding the free market economy. That is, there is a need for profound changes in orientations and conduct in order to avoid serious market minefields and minimize the reoccurring of catastrophic economic crisis. This is possible only if:
a. Corporations are flexible and adaptive to emerging circumstances (pragmatism),
b. Senior managers understand that in today's world moral clarity, transparency, and individual responsibility toward society and the organization are instrumental in minimizing deception and corporate fraud (purposeful conduct),
c. Mechanisms are set for a vibrant and workable partnership between government and the private sector (pragmatism),
d. Individuals and corporations look beyond their immediate interests and closely align economic activities with societal goals (Pragmatism and Purposeful Conduct= Responsibility).
The underlining assumptions of the above conditions are a lack of responsibility toward organization and society always leads to catastrophic consequences, business organizations cannot exist independent of the society, business organizations have a broader role to play in the society and they are vital instruments for wealth creation, and that any man-made system, like capitalism, is amenable to change, evolution, and or demise. That is capitalism, like socialism, has its flaws and bright spots. In practice, socialism failed to meet changing customers' needs and those who applied it were miserably inept in anticipating changes and understanding human motives and aspirations. Capitalism could face similar fate if societal interests are ignored and selfishness, deception, and greed are left without adequate mechanisms to deal with them on a timely basis.
Increasingly, it has become clear that the legitimacy of business organizations stems primarily from societal approval. Indeed, in the long run, survival and growth of firms are possible only when these organizations are driven by compassion and purpose. At the end, this is the only measure for a firm's vitality. More importantly, for a free market economy to function appropriately it must be built on a moral foundation and trust. Responsible conduct is essential for the renewal and evolution of capitalism and for creating an environment conducive for competition and innovation.
Ali, Abbas J. (2000). From social responsibility to global compact: Toward inclusion policies and responsive business operations. Competitiveness Review, Vol. 10 (2), i-iii
Ali, Abbas J. (2006). Rethinking competition. Competitiveness Review, Vol. 16 (3 &4), 171-72.
Brown, Gordon. (2009, March 24). PM speech to European parliament. Available: http://www.number10.gov.uk/Page18718
Capitalism Magazine. (2009, February 4). As Wall Street bonuses go, so goes the liberty of all of us. Available: www.capmag.com/article.asp?ID=5415.
Handy, Charles. (1999). Finding sense in uncertainty. In Rowan Gibson (Ed.), Rethinking the future (pp. 17-33). London: Nicholas Brealey Publishing.
Johnson, Simon. (2009, May). The quiet coup. The Atlantic. Available: www.theatlantic.com.
Obama, Barack. (2009, January 21). President Barack Obama's inaugural address. Available: http://www.whitehouse.gov/blog/inaugural-address/
Obama, Barack. (2009, February 26). The president's message. Available: http://www.whitehouse.gov/omb/assets/fy2010_new_era/ President's_Message1.pdf
Tracinski, Robert W. (2002, July). The moral basis of capitalism. Capitalism Magazine. Available at www.capmag.com/article.asp?ID=1701.
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|Author:||Ali, Abbas J.|
|Publication:||Advances in Competitiveness Research|
|Date:||Jan 1, 2009|
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