Capitalism is under attack in many quarters. In the wake of the recent – and current – economic crisis, abundant articles have been published questioning the viability of capitalism as an effective and reliable economic and political system.
This is understandable, but unfortunate. Amid the attacks and rebuttals, what often gets lost are the principles that, historically, have made our economic system, the best and most productive in the world, work so well. By refocusing on basic principles, capitalist enterprises can be governed to serve and benefit all constituents.
I recently spent a few days thinking about these questions in Caux, Switzerland at a conference called the Caux Round Table on Moral Capitalism. The Caux Round Table (CRT) has been around for more than 25 years, with chapters in many countries and support from a variety of business, academic and leaders of non-government organizations. I was asked to participate this year because of my recent doctoral work on principles-based governance of executive compensation.
The basic premise of the CRT is that capitalism, while still the most effective economic system in the world, needs a moral or ethical foundation. The concern of the CRT’s founders and many current participants is that capitalism, as it is practiced in today, has lost its moral underpinnings. That has led to many of the world’s – particularly, the Western world’s – economic problems and disasters over the last 20 years.
The core of the Caux Principles, initially developed in the 1990s, is that companies and those who run them should serve all constituents, including owners, customers, employees, vendors, communities and the environment. A corporation is responsible to all constituents and should behave accordingly.
This is admirable and inspirational. Moreover, it is highly pragmatic—and probably essential for the future of humankind and the planet. Yet I question whether it has anything to do with morality or immorality. Perhaps this is just a matter of semantics, but I prefer not to designate a person, company or system as being moral or immoral. Our world is divisive enough without making such potentially inflammatory distinctions.
I attended the conference as a pragmatic agnostic. I certainly believe that the capitalist system, as practiced in the U.S., works reasonably well. Capitalist enterprises produce great innovations, constantly increase productivity and efficiency and provide an ever-improving quality of life. The capitalist system is also prone to great excesses, booms and busts, high concentration of wealth and environmental degradation and disasters. In the U.S., our capitalist system, over the last 30 years, has also produced increasing income and wealth inequalities, characterized by stagnant real wages and family income levels for most people.
Despite its inequities, capitalism, as an economic system, is neither moral nor immoral. It is amoral. Capitalism is no more moral or immoral than an automobile or the highway it runs on. It is a system that operates by certain principles. Just as an automobile operates by principles of physics, a capitalist economy functions by certain principles of economics. If the core principles are not followed or are out of balance, the system does not function efficiently or breaks down.
In many ways, Western economies have broken down. So what are the core elements or fundamental principles by which capitalism functions best?
I propose that capitalism operates, or should operate, by four core principles:
- Ingenuity. This principle encompasses the inherent drive among capitalist enterprises to develop new products, achieve efficiencies and innovate. Ingenuity is the spirit of entrepreneurialism.
- Fair Payment/Accountability. Those who develop an innovative idea, provide the inputs for its implementation and take the risks associated with the resultant enterprise are entitled to the excess profits from that enterprise, once all inputs to production have been fairly compensated.
- Responsibility. An entrepreneur, business person or corporation is completely responsible for the impact they have on the world in which they operate, – including customers, suppliers, employees, communities and the environment.
- Stewardship. Responsible capitalists, business leaders, employees and citizens are stewards of their businesses, communities and the environment. This is the highest principle by which any great organization operates, and is the main principle that should guide the board of directors of any organization.
Without these core principles, our economic system would fall into stagnation, exploitation, protectionism and crisis. Now, more than ever, those of us who enjoy the abundant benefits of the capitalist economic system need to ensure that it works well for everyone.
It is the job of all of us – entrepreneurs, business leaders, board members and employees – to understand these core principles and to use them in running our businesses and planning our future. Toward that end, I will be writing posts on each of those principles over the coming weeks. I look forward to your comments.
