Doing Capitalism Right

It is frustrating when people criticize capitalism as a economic system, because usually what they are really criticizing is the economic system that currently exists in the United States of America. Spoiler alert: the current economic system in America is hardly capitalism. It’s more like a mix of cronyism and feudalism, with a veneer of capitalism used to justify the system. In this post, I’ll focus on what briefly describing what capitalism done right looks like. I will go into more depth, as well as criticisms of current societal, market, organizational and individual practices in subsequent posts.

So what does “Doing Capitalism Right” look like?

The ideal of capitalism is some combination of those highlighted in the works of Max Weber and Adam Smith discussed in my earlier post:

An economic system that encourages the contributions of individuals to society in a way the maximizes the collective good of everyone by allocating resources and talents to those activities and outcomes that are most valued by individuals and society. The way that this is accomplished is by rewarding those who do a better job of meeting the needs and wants of individuals and society through the market mechanism.

It really is that simple. But as both Smith and Weber observed, the system doesn’t work correctly when the focus is on maximizing the wealth of those in power at the expense of individuals and society.

Market Focused Management as the Embodiment of Capitalism

In Marketing (as a practice and an ideal), we discuss three different assumptions that underly organizational cultures and how those organizations operate.

Production orientation

The focus here is on creating stuff as efficiently and effectively as possible and selling it for as much money as possible. It’s all about the innovator and producer. It’s a bit like the old saying, “Build a better mousetrap and the world will beat a path to your door.”

Sales Orientation

The focus here is on selling, selling, selling for as much as the market will bear. If we sell enough – for enough – we will make lots of money. (Unfortunately, what most people incorrectly refer to as marketing.)

Market Orientation

A market orientation is an externally focused culture in which the preoccupation of the organization is “How do we make money by improving the lives of others?” The organization starts by understanding the context of customers (consumers or other organizations), as well as the context of potential channels and partners to serve those customers, and then develops solutions (value propositions) accordingly. Key to those solutions is that they make the channels/partners and customers better off than they would be without the solution. That might include a comparable solution at a lower cost to the customer or a solution that makes the customer better off at a price that is equal to or lower than the value of that improvement. (I published a book and an award-winning article that explain how to create a greater market orientation, in case you’re interested.)

I thought that this post was about capitalism….

Well, yes, it is. The point of this post is that the philosophy underlying capitalism is about making all of us, as consumers, better off over time. The people and organizations that are more successful at realizing the ideal of making people better off make more money than other people and organizations. This is an empirical fact that has been documented across a bevy of management and marketing studies.

Note that within capitalism, the “producers” are also consumers and many consumers also work for producers, so the notion that consumers are better off also includes that assumption that the system provides work and income for those same consumers. Providing goods and services to consumers who cannot buy them because they don’t have employment is not a functioning system.

When capitalism works correctly, everyone is better off over time. That is the ideal that capitalism promises. That is the ideal as described by Adam Smith and Max Weber. Unfortunately, that is not the situation in which America finds itself today. In future posts, I’ll be offering thoughts about how we can return to those ideals in practice, rather than rhetoric.

Why “Recapturing the Spirit of Capitalism?”

The name of this blog is inspired by the Sociologist Max Weber’s 1930 work “The Protestant Ethic and the Spirit of Capitalism,” in which he argues that the Protestant work ethic played a key role in the growth and success of capitalism in the West – and the United States in particular. The following quote largely captures Weber’s thesis that the notion of “a calling” to serve one’s fellow man through the capitalistic system largely explains its success among Protestant cultures.

Labour in the service of a rational organization for the provision of humanity with material goods has without a doubt always appeared to representatives of the capitalistic spirit as one of the most important purposes of their life-work. It is only necessary, for instance, to read [Benjamin] Franklin’s account of his efforts in the service of civic improvements in Philadelphia clearly to apprehend this obvious truth. And the joy and pride of having given employment to numerous people, of having had a part in the economic progress of his home town in the sense referring to figures of population and volume of trade which capitalism associated with the word, all these things obviously are part of the specific and undoubtedly idealistic satisfactions in life to modern men of business. (Weber, pages 36-7)

At the end of the book he notes how this foundation of “callings” and “idealistic satisfactions” in serving fellow citizens was disappearing. And he offers a fairly chilling assessment regarding the future of capitalism:

The Puritan wanted to work in a calling; we are first to do so. For when asceticism was carried out of monastic cells into everyday life, and began to dominate worldly morality, it did its part in building the tremendous cosmos of the modern economic order. This order is now bound to the technical and economic conditions of mating production which today determine the lives of all the individuals who are born into this mechanism, not only those directly concerned with economic acquisition, with irresistible force. Perhaps it will so determine them until the last ton of fossilized coal is burnt. In [theologian] Baxter’s view the care for external goods should only live on the shoulders of the “saint like a light cloak, which can be thrown aside at any moment.” But fate decreed that the cloak should become an iron cage.Since asceticism undertook to remodel the world and to work out its ideals in the world, material goods have gained an increasing and finally an inexorable power over the lives of men as at no previous period in history. Today the spirit of religious asceticism – whether finally, who knows? – has escaped from the cage. But victorious capitalism, since it rests on mechanical foundations, needs its support no longer. The rosy blush of its laughing heir, the Enlightenment, seems also to be irretrievably fading, and the idea of duty in one’s calling prowls about in our lives like the ghost of dead religious beliefs. Where the fulfilment of the calling cannot directly be related to the highest spiritual and cultural values, or the, on the other hand, it need not be felt simply as economic compulsion, the individual generally abandons the attempt to justify it at all. In the field of its highest development, in the United States, the pursuit of wealth, stripped of its religious and ethical meaning, tens to become associated with purely mundane passions, which often actually give it the character of sport.

No one knows who will live in this cage in the future, or whether at the end of this tremendous development entirely new prophets will rise, or there will be a great rebirth of old ideas and ideals, or, if neither, mechanized petrification, embellished with a sort of convulsive self-importance. For of the last stage of this cultural development, it might well be truly said: “Specialists without spirit, sensualists without heart; this nullity imagines that it has attained a level of civilization never before achieved.” (Weber, pages 123-4)

And that disappearance of a raison d’être that ties individuals’ work to helping fellow citizens is responsible for most (if not all) of the negative effects of capitalism seen today. Essentially, capitalism has become a religion of its own, where people have faith that it “works” and is “the best,” without understanding or questioning the assumptions and limitations underlying capitalism. One example is the assumption that by focusing solely on maximizing shareholder value, companies will provide the maximum value for all stakeholders, including employees and customers, due to the “magic of capitalism.” I’ll call bullshit on that article of faith in a subsequent post.

Since I am a business school professor (in marketing, no less!), this may seem to be heresy. But, in fact, it is an effort to highlight the historical underpinnings of much of what falls within “business” today to help people understand and consider those assumptions and theories when “doing capitalism.” And it’s not heretical. Adam Smith, arguably the father of modern capitalism, wrote in his 1776 book “An Inquiry into the Nature and Causes of the Wealth of Nations,”

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident, that it would be absurd to attempt to prove it. But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce. (Smith, page 715)

Therein lies my primary motivation for this blog. To bring us back to these roots of capitalism to understand why it is or isn’t working out as planned – and ideally to offer solutions on how to optimize our societies, institutions and organizations to “Recapture the Spirit of Capitalism.”