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After Capitalism – then what?

August 25, 2012 Thought Leaders 6 Comments
Dennis Pratt

“Prediction is very difficult, especially if it’s about the future” Niels Bohr

But speculation is fun, so could something like this one day come to pass?

After Capitalism – then what?

Dennis Pratt

Is capitalism simply the natural order of things? Is it destined to be with us forever? Or could it eventually wear out its welcome and one day be replaced by something better? If so, what might that ‘something better’ be?

Chances are that if you are reading this you won’t have lived under any other economic system. But others have – over the centuries people tried several ways of organising their economies. Earlier systems included feudalism and mercantilism, and some nations later tried a rather extreme version of socialism called communism; but just about everybody has, sooner or later, pretty much ended up with capitalism in some form. It has been a process of natural selection – survival of the fittest ism.

Some people have been less than happy with it. Karl Marx and others pointed out flaws in capitalism, but their proposed alternatives seemed to have even more flaws. And the Occupy movement recently attracted a lot of attention by criticising the status quo, but that movement has in turn been criticised for being unfocused and not offering practical alternatives.

So, after feudalism, mercantilism, communism and capitalism; could there perhaps be another ism lurking somewhere that might one day replace our current system? If there is, it’s not likely to just emerge and become the accepted economic system like capitalism did. It will have to be consciously designed and planned and chosen by society. Capitalism isn’t likely to move aside willingly to make way for an alternate philosophy – one of capitalism’s defining features is competition. It has aggressively seen off all alternatives so far and would do so again unless the change is planned and a decision is taken to give other elements of society equal weight to that currently enjoyed by the economy. And ‘the economy’ today means ‘capitalist economy’.

The rise and rise of capitalism

Over the centuries that capitalism has been with us it has evolved and has adapted very successfully to changing social, political, technical and global environments. Its basic principle – individual ownership of economic resources – broadened over time to encompass other forms of ownership such as partnerships, cooperatives and mutuals, joint stock companies and even ‘state capitalism’. From quite early in its development it also encompassed ‘crony capitalism’, a form of corruption that is alive and well today and is exploiting populations in many parts of the world.

As capitalism itself evolved, so too did capitalist societies. Investment processes (such as superannuation) were encouraged to accumulate capital and share the financial benefits of ownership more widely across populations. But two drivers of capitalist progress – individualism and competition – had to be constrained by laws aimed at limiting the worst excesses of individualistic behaviour (selfishness and greed) and competitive behaviour (monopolising the marketplace).

Communism, tried by several nations as an alternative economic system, mostly either failed (eg USSR) or was quietly modified to adopt many features of capitalism (eg China). Communal ownership of economic resources didn’t turn out to be as productive as individual ownership. Capitalism has been and clearly remains the dominant economic system across the developed nations of the world.

But ‘dominant’ also applies to the way the capitalist economic system interacts with other aspects of society: “The economy, stupid” was a standing admonition to Bill Clinton from his campaign adviser during Clinton’s successful bid for the presidency of the USA, aimed at reminding him of the key place economic wellbeing held above all other factors in the minds of voters. And whilst capitalism has provided that economic wellbeing and has mostly supported other elements of society rather well, it has also subordinated those other elements to the needs of the economy.

The corporate body – a different sort of ‘individual’

Contributing greatly to economic progress in capitalist societies has been the modern corporation, which was conceived around 1600. The ability to consider an enterprise as a body which is legally separate from its owners encouraged the aggregation of capital and investment in large organisations capable of performing functions far beyond the ability of an individual person.

Investors in these corporations were not only legally separate from the corporate body, but many also became emotionally separated as stock exchanges were developed to enable trading of shares and as laws were enacted which limited shareholders’ liability. Investors have arm’s-length ownership of a corporation.

Today, many companies’ owners are no more deeply involved with the corporate body than the businesses customers or suppliers, and are often far less emotionally involved than the company’s staff. Like the customers, suppliers and staff, they come and go from the corporation. They die and the corporate body lives on. Ownership duration can be measured in days when shares are heavily traded. With short selling, ownership duration is negative – so much for emotional attachment of the owners.

The first corporations required a royal charter (in monarchies) or a parliamentary charter (in republics), but this requirement was soon replaced by simple registration with a public authority as the benefits of incorporation became apparent. These authorities developed corporations laws to ensure good governance practices were followed within corporations, and the owners were required to appoint directors who could be held legally accountable for the corporate body’s adherence to these laws.

While the concept of the corporation grew mainly from joint stock companies, the advantages of corporatising soon led to organisations with all forms of ownership setting themselves up as corporations. The local plumber or doctor, who may have started out as a sole trader, will often become a limited liability company in order to enjoy the benefits of incorporation. Government trading agencies may corporatise to give a degree of independence from government. Turning a government agency into a corporation may also be a step along the pathway to privatisation.

So, whilst individual ownership of economic resources and competitive exploitation of those resources was the philosophical starting point for capitalism, over time the corporation became the major owner and exploiter rather than the individual person. The corporation has become the key ‘individual’ in capitalist practice. Corporations are now a major instrument in the implementation of capitalism and the driver of capitalist economies. Nations’ economies are so dependent on the performance of corporations that the failure of a few large ones can crash the economy of a whole nation and even spark off a global financial crisis.

But a corporation is merely a legal construct. In many ways it is required to act like a person and is legally treated as a person, but it’s not really a person. Corporations are created by law and are required to behave according to various laws. If we changed the laws applying to corporations, could we maybe change society? The corporation in its present form is the foundation building block supporting capitalist economies, which are in turn supporters of capitalist societies. In a modified form, could that building block perhaps be used to construct a different and better society?

A corporation and its stakeholders

A corporation’s founding owners create it, register it, and appoint directors to run it on their behalf. The corporation depends on its owners for its existence, and they depend on it to fulfil their requirements of it (usually to generate a return on their capital investment, although some owners may have quite different requirements).

The term ‘stakeholder’ has made its way into the popular lexicon over the past few decades, based on the idea that a person or group of people may have a stake in how well something does what it is expected to do. Owners clearly have a stake in their corporation but, once it is set up and operating, so too do several other groups of people. If a stake is defined as a two-way dependency, then in the same way that it depends on its Owners and its Owners depend on it, so too does a corporation have a stakeholder relationship with its Customers and Suppliers, its Staff, the Community in which it exists and the Industry of which it forms part. The corporation depends on all six stakeholders for its existence, and all six stakeholders depend on the corporation to do the things they require it to do.

But corporations law favours one stakeholder above all others. This is more rigidly so in Anglophone legal systems, but it is generally the case in all capitalist societies that a company’s directors are required to satisfy the requirements of the Owners. The corporation sees other stakeholders either as a resource to be exploited or as a constraint on freedom to conduct the business. Concepts such as triple bottom lines and balanced scorecards may indicate broader social concerns by some corporations, but when the crunch comes directors are required to act in the best interests of the corporation, which is interpreted as the best interests of the Owner stakeholder.

Corporations law is relatively unconcerned about the interests of the other five stakeholders. It does limit anti-competitive behaviour and it does forbid trading while insolvent, but these concerns are about collusion in ‘the market’ and failing to provide adequately for ‘creditors’. There is no concern for the broad interests of the Customer stakeholder other than that the market be fair, or for the Supplier stakeholder’s interests other than they are paid what they are owed.

Individualism, competition and society

Some of the less attractive aspects of capitalism can be seen where corporations are in a position to exploit their stakeholders. In Australia two supermarket companies dominate the industry and both can be seen to be relentlessly pursuing their own interests, constrained only by whatever counter-pressures can be brought to bear by stakeholders. So when these supermarket giants use their dominant positions to drive prices paid to Suppliers below what they can survive on, the Suppliers’ only recourse is to band together in some way and appeal for help from other stakeholders. Some support may come from the Community stakeholder via its political system enacting regulations, but support is unlikely to come from the Customer stakeholder. Customers are just as self-interested as the supermarket companies. If exploiting a supermarket’s Supplier gives its Customer cheaper prices, the Customer may express some sympathy for the Supplier stakeholder, but Customer self-interest will inevitably win the day.

Competition also has its unattractive side. While competition undoubtedly can bring about innovation which produces better products and services, it can also lead to killing off entities that may satisfy the important needs of some stakeholders but not others who are crucial to its survival. Society may be poorer for their demise, but capitalism says there is no place for an entity that can’t compete.

Self-interested individualism and competition permeates capitalist society. ‘What’s in it for me’ becomes the way of thinking for corporations and for people. Corporate sponsorship of worthy causes within society is evaluated on a return on investment basis rather than being done for the common good. NIMBY behaviour is standard reaction to anything that inconveniences an individual for public benefit. John F Kennedy’s “Ask not what your country can do for you – ask what you can do for your country” went down well in 1961, but by 1987 the fictional character Gordon Gekko could say “Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.” History records Kennedy in a favourable light and the movie portrayed Gekko as a villain but, in capitalist societies through the eighties and in the decades since, there has been a fair bit of evidence suggesting that Gekko’s is the voice for our times.

Self-interested corporations and people ask ‘what can we get away with?’ rather than ‘what is the right thing to do?’ Capitalist societies’ legal systems are constantly playing catch-up as corporations and people find new ways to get around the rules. So financial institutions have no qualms about creating complex derivatives based on sub-prime mortgages, then packaging those products so that they fool the system into rating them AAA. The subsequent crash may wipe out a few of these corporations when mortgagees can’t meet the repayments, but society wears the brunt of the loss. Meanwhile the operators and traders in those corporations who bent the rules to breaking point walk away with large bonuses rewarding them for their cleverness.

Within the capitalist frame of thinking, it is accepted that kind of behaviour is inevitable. Two opposing solutions are proposed – tighter regulations or let the free market sort it out. Neither proposal solves the problem from the viewpoint of the wider society. Scams will still occur and society will have to clean up the mess.

Stakeholder Thinking

Could it be that developed societies have achieved most of the benefits they are ever likely to receive from capitalism and are now at the point where the ugly side of capitalist thinking and capitalist behaviour outweighs its beneficial side? Or is it possible that we could, as Charles Handy has suggested, have a ‘better capitalism’ with ‘proper selfishness’ and a ‘doctrine of enough’. Has capitalism gone too far for that? Have we reached the stage where corporations and individual people feel so entitled to exploit society that there is no way back from those feelings of self-centred entitlement within capitalist thinking?

Let us try a different sort of thinking.

With the corporation being such an important influence in developed society, a change in corporate behaviour could set a model for behaviour at all levels in society. And because the corporation is merely a legal construct, and because all corporations’ behaviours are governed by corporations law, if that law required corporations to heed the requirements of all six stakeholders – Customer, Supplier, Owner, Staff, Community and Industry – rather than just the requirements of the Owner stakeholder, there would have to be a dramatic change in corporate behaviour.

Social change occurs either by people developing new attitudes and beliefs which lead to new behaviours, or by situations demanding new behaviours with the attitudes and beliefs catching up later. It is unlikely that the ‘capitalist class’ (as ideologues term the Owner stakeholder) will readily develop new attitudes and beliefs that would lead to sharing their influence with other stakeholders. And managers within corporations would be presented with the much more challenging task of balancing stakeholder requirements rather than simply satisfying one whilst exploiting others or finding ways around the constraints they try to impose, so they are also unlikely to readily change their beliefs from a capitalist to a stakeholder mode of thinking.

No amount of articles like this one, or even exhortation from gurus like Charles Handy for people to be satisfied with ‘enough’, is likely to bring about an attitudinal change that will lead to more desirable behaviours. Only a change in corporations law requiring corporate behaviour that balances the needs of all six stakeholders will lead to a change from capitalist thinking to stakeholder thinking in corporations. It will take time (at least a generation) for beliefs and attitudes to catch up with the legislated behaviours, but that is standard for major social change.

(Within the culture of the USA for example, moving from capitalism to something else would be a social change on a level with developing racial tolerance, and that is still a work in progress following on from the anti-segregation legislation of the 1960s which demanded a major change in behaviours. Beliefs and attitudes can be seen to have quite a way to go yet in some parts of the USA.)

Where the required behaviour change is complex, introducing social change by changing the law tends to be done gradually. The starting point is usually a law banning some behaviours and encouraging others, but not going all the way in one step. Subsequent amendments and additions tighten the requirements over time.

An interesting scenario would be to have the directors of every corporation required to publish a set of six statements: How our corporation intends to be seen by our stakeholders: one statement for each of Customers, Suppliers, Owners, Staff, Community and Industry. Would, for example, our two big supermarket companies be prepared to go public with statements like We intend to be seen by our Suppliers as rapacious bastards who will screw them down at every opportunity ? Could we perhaps see statements of how we intend to be seen by our shareholder Owners changing from delivering maximum return on investment to reasonable return?

The starting point could simply require the widespread publication of the How we intend to be seen statements followed by a waiting period to gauge corporate and public reaction. Later amendments could require annual company returns to report on adherence to these statements and so on. The important thing is to get started – there is no predicting where it may end up. At present, in Anglophone countries, a company’s directors represent the interests of the Owner stakeholder. Could we end up with other interests also being represented on company boards?

There are partial models available from places like Germany where the law requires Staff representation in larger companies. Introduced after WWII, co-determination (mitbestimmung) requires at least one staff-appointed director in single-board companies or a higher proportion on the supervisory board of companies with a two-tier board structure. As with most such changes, the early laws applied to only a couple of industries and very large corporations. Over time, the scope was widened to include all industries and medium organisations as well as the large ones. Could it be that board representation of other stakeholder interests should be added to the Owners and Staff? Rather obviously, Germany’s corporate world hasn’t collapsed as a result of their laws. Over time, who knows what might be possible?

But even if the change went no further than all corporate bodies having to publicly recognise their relationship with all six stakeholders, and having to undertake to treat those stakeholders with dignity and respect through something like How we intend to be seen statements, we could see at least a softening of the self-centred beliefs and attitudes that capitalism has increasingly imposed on developed societies. And if corporations were seen by society generally to be reversing the trend and moving away from total self-centredness in their behaviours, and if corporations required similar respectful behaviours from every employee towards their stakeholders, surely the effect on society at large would be a positive one?

Vale Gordon Gekko? Maybe. We live in hope.
Author’s note:

I wrote this (flight of fancy?) in the hope that it might stimulate further thought on the part of people from all sorts of disciplines. I have spent most of my working lifetime in organisational design and organisational behaviour, so it is written purely from that perspective. I have little knowledge in areas such as economics and law which obviously are important to understanding the way the economy contributes to society and how corporations contribute to the economy.

I also have not gone near the usual critiques of capitalism which tend to come from people with an ideological bent, concerned with how the benefits of capitalism are distributed between the ‘capitalist class’ and the ‘working class’. I leave that for others to worry about.

If people have other thoughts on the idea of capitalism coming to an end and being replaced in some way by something (hopefully) better, please comment and perhaps start a conversation. I am really interested to hear other ideas: Has capitalism gone as far as it can go, or could it evolve into something better? If it has to be replaced sometime, will it have to be a legislated change? It would probably be best if it wasn’t changed by revolution as happened in communist countries. Revolutions are so untidy.

Then there’ll be the problem of what to call it. Stakeholder doesn’t go well with ism.

At a more down-to-earth level, I have for some time been writing a series of chapters on the use of stakeholder thinking for measuring performance of and within organisations. As a consultant, I worked in this area from the late 1960s until retirement a few years ago, so I thought it might be useful to document some of the things I learnt along the way. For those interested, the chapters are going up one by one as they are written. The overall title is If you can’t measure it, don’t bother doing it. Nobody will know you’ve stopped. It’s on Robert Re’s website www.leadershipatwork.com.au
Dennis


ABOUT THE AUTHOR

In a rather lengthy career, Dennis Pratt has been an aircraft engineer, manager of apprentice training, internal change consultant, lecturer in psychology, partner in a small management consultancy, manager of human resources and, from 1984 to 2006, a self–employed consultant specialising in organisational design and organisational performance.



About the Author -

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6 comments

  1. Robert on said:

    Have to say a little underwhelmed. There was precious little ideas in terms of what the next ideology might be and a lot of what we already know.

    Great title, but lacking in content.

    However here is my idea to institutionalize the needs or the client / supplier, stakeholders, into a framework of corporate governance.

    The stakeholder Fund.

    When a client pays the company for service or goods, an element [5% perhaps] of their bill shall be put into a Stakeholder Fund [STAF]. This sum shall be kept by the STAF over a Term [say 5 years] and returned to the client, at end of Term, with no interest paid.

    This works, by a] setting aside a fund, that will put a rationale for the client to want the company to survive. It also gives a financial incentive to the client, to see that the company thrives.

    The STAF may be drawn upon at Bank rate, as a loan pool for the company. Alternatively the company may draw the interest, with the provisio that it pays tax on the interest to the state. STAFs are to be refunded to the client at the end of the TERM [5 years].

    This incentivizes companies to build and makes them more likely to stay around. It rewards companies that continue to trade and build. And it offers a lower rate of borrowings for larger companies, taking business away from the Banks.

    The company, never gains access to STAF but it does mean they can use STAF as collateral for borrowings.

    At the end of term the original sum is paid back to the client.

    In the event that the company cannot pay back the loan from STAFs, the company will be deemed insolvent and STAF will be the primary benefactor in any liquidation of assets. Also a record of company and individual history with STAF can be kept to monitor how it is used.

    STAF would essentially act like a Trust, with the Beneficiaries being the clients, but the company having access to the fund for means of collateral for loans.

    Suppliers, could also pay into STAF.

    Idea. ..

    Robert

  2. Hi Robert,

    The Stakeholder Fund is an interesting idea, but it seems to be aimed at solving a problem somewhat different from that which I was trying to explain. My concern is with the impact of capitalist thinking on human behaviour and especially the way capitalism promotes individualism and self-centredness to the point of social dysfunction we see today.

    Lots of people have suggested alternatives or modifications to capitalism, saying that other elements of society should be given at least equal weight to the economy. They don’t seem to have had much success, despite what seems to be widespread dissatisfaction with the existing system by many who have not been capitalism’s major beneficiaries.

    Because of my background, I saw the corporation as a feature of modern society that could be used as a lever to change society overall. As a consultant, I had started working on the stakeholder concept through the 1970s and had my ideas mostly in place by 1980. Many others have also worked and published in the field, with the Royal Society for the Arts and Manufactures ‘Tomorrow’s Company’ project being the best publicised. My thought was that if we could bring about visible change in corporate behaviour, it would act as a model for overall societal behaviour.

    Despite many small successes in developing stakeholder thinking in progressive corporations, it has been largely ignored. Capitalist thinking has remained dominant and pretty much impervious to change. That is why I suggested corporations law as something the political system could use to change corporate behaviour. If corporations behaved in a more balanced way; less self-centred and less individualistically; perhaps society at large could be influenced to follow suit.

    I am not surprised (nor disappointed) that you were underwhelmed and saw little new in what I wrote. Better underwhelmed than overwhelmed, and from the odd few decades I spent trying to introduce change in organisations, I have learned it takes very little whelming to activate resistance forces. That’s why I suggested gradualism in law change as has been done with other law-based changes to society. I do think legislating to require ‘how we intend to be seen’ statements as a first step would have a reasonable chance of success. Requiring 5% to be contributed to a stakeholder fund would be a step too far perhaps?

    Dennis

  3. Robert Re on said:

    Hi Dennis,

    Another “ism”, with which you are familiar, is Distributism, best described in Race Mathews book, Jobs Of Our Own. The basis of Distributism is the belief that a social order can be achieved through a much more widespread distribution of property.
    Some of the earlier establishments of cooperatives in the food processing and textile industries in Australia are good examples of Disributism at work. The even more impressive cooperatives in the Basque region of Spain are still in evidence today.
    More could be done to explore options such as these on a community basis, now and in the future.

    I thank Dennis for raising the topic, underwhelming or not, and believe this is a discussion we must have. Our political Leaders are showing little signs of leading in this important area.

    In the words of Management educators, Danah Zohar and Ian Marshall ( See their book Spiritual Capital – Wealth We Can Live By ) these are the two strikingly different scanarios for the future …

    “The fist is business as we know it today- all self-interest, short term gain, isolationist thinking, with the bottom line as king.

    The second envisages a business culture driven by fundamental values and a deep sense of purpose . The emphasis is on stakeholder value, where stakeholders include the human race, present and future, and the planet itself.”

    That’s Stakeholderism!

    Robert Re (not to be confused with the previous “Robert”).

  4. A terrific evisceration of the corporate system. Spot on. I don’t share your optimism about the potential for legislation to be enacted to control coporate behaviour. It is the corporations that write the law now in the US and they won’t be controlled by us under WTO. One only has to look at the experience of our democratically elected government when it had the temerity to suggest the (overwhelmingly foreign-owned) mining companies were facing higher taxes. If we wrest control of society back from the corporations it will be through a revolution, nothing less.

    Have a look at the following if you’re interested in the fraud at the heart of the system. It’s only around 20 minutes worth.

    http://www.manfriday.com.au

    Daniel Jeffares

  5. Pingback: The National Learning Institute How does Paper Money jeopardise our economy, and ultimately our existence? - National Learning Inst

  6. Dennis Pratt on said:

    Hi Robert (Re) and Daniel,

    I found both your comments interesting. In Robert’s case perhaps a little on the hopeful side considering the rather sad history of distributism over the past couple of decades, and perhaps a little on the pessimistic side from Daniel?

    The cooperatives favoured by Robert are anathema to the capitalist. Capitalism promotes individualism, self-centredness and unfettered competition. We have seen de-mutualisations in the finance industry to “release value” and we have seen failure of rural cooperatives brought about by competitors who pay more for farmers’ produce and charge less for supplies. Competing companies appeal to short-term self-interest by offering deals which entice members to not support or to abandon their mutuals and cooperatives.

    Robert mentioned the worker cooperatives operating in the Basque region. Their survival is noteworthy, although partly due to the unique affinity of the people to Basque values. But many other worker cooperatives have been driven out of business by traditional capitalist competitors with exploited and underpaid workers, which enables them to undercut the prices charged by the cooperatives. As I noted in my article, capitalism became the dominant economic and social system by aggressively seeing off the alternatives, and it is unlikely that capitalism will be replaced by an evolutionary process.

    And while Daniel doesn’t share my optimism about legislative processes bringing about change, with “revolution, nothing less” being his preferred mechanism, there have been some examples of political processes leading to dramatic improvements in social behaviour. (I mentioned de-segregation in the USA and co-determination in Germany as examples of legislative gradualism bringing about major change.) As I said, revolutions are so untidy. Even public protests like the Occupy movement seem to lose their focus somewhere along the line. Often, the change you end up with is not what you really wanted when you started the revolution.

    I don’t see it happening in my lifetime. But, as I said, it’s fun to speculate.

    Dennis


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