ECONOMY

What Happened to Good Old-Fashioned Capitalism?

Some business leaders are speaking out about a growing imbalance in social economics. Here's why they think capitalism--and society--are in need of saving.
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In the past when I've heard about new economic theories and proclamations that the old rules of business are "dead," I've run for cover because, inevitably, a disaster follows. When social and economic forces have come to balance one another over centuries, assuming that you can overturn what has worked with impunity is a dangerous practice.

But some leaders in business, economics, and politics are doing that the very thing. In fact, a version of capitalism has emerged that shatters some long-standing assumptions, such as the idea that productivity improvements occur among all economic classes. They speak of an increasing wealth inequality and an accompanying threat to capitalism. Dominic Barton, global managing director of McKinsey & Co., is one of these thinkers and expressed his view in a recent interview with the Wall Street Journal.

In 2012, the top 1% of earners in the U.S. collected 19.3% of the country's total household income-an all-time high, according to work by Emmanuel Saez at the University of California at Berkeley. The disparity is growing rapidly as well. Incomes of the top 1% grew by 31.4% from 2009 to 2012, compared to just 0.4% for the remaining 99%. There is still considerable debate among economists on the impact of income inequality on economic growth and the short-term recovery from the recession. However, few would disagree that unchecked increases in inequality will be costly for capitalism in the long-run due to the divisions that it creates within society and the strain that it puts on social safety nets.

Barton is not some wild-eyed liberal who woke one morning to find himself transformed into a major player in the world of business. 

Higher Minimum Wage: Now a Conservative Value?

Another example is conservative businessman Ron Utz, publisher of the American Conservative, who has called for a $12 an hour minimum wage in California by 2016.

"There are so many very low-wage workers, and we pay for huge social welfare programs for them," he said in an interview. "This would save something on the order of tens of billions of dollars. Doesn't it make more sense for employers to pay their workers than the government?"

What these two are addressing is the need for a stable economic system in which everyone has enough of a stake to support it. Wealth accumulation is fine. People create businesses to achieve that goal--among others. And that's the point. Business cannot be about profits only. As Harvard Business professor and former CEO of Medtronic, Bill George, puts it:

I don't subscribe to the notion that companies exist to create value strictly for their shareholders. I think they are there to create value for the customers. I think we need to reorient how we think about capitalism. Anyone who's willing to postpone the long-term strategies to make the short-term numbers is in route to going out of business.

Not only can it drive a company out of business, but it can push a community or a company to the edge of disaster. You create a class of people who cannot afford ever to do business with you--or much of anyone else, for that matter. Henry Ford was canny when he paid his factory workers significantly more than his competitors paid theirs. Ford wanted more people to be able to buy automobiles because it would grow the market and his company with it.

Keeping control of costs is important. But when you squeeze too tightly, you cut off an important form of circulation for all of society. And there are no companies that can exist outside the context of a society. Who would do business with it?

Leave Money on the Table

After about 30 years of business improvements being diverted almost completely from the workers, society has changed into something where even many two-wage-earner households can no longer keep up. Sure, profits are higher--at historical levels, for that matter. But we increasingly destabilize the common existence on which all businesses and people depend.

It's time for entrepreneurs to emulate Ford and be canny. Find ways to support reasonable pay for employees at your business and pressure other companies to do the same. Forget the saying about all boats rising or sinking together. There is only one boat. If it goes awash, it won't matter how much you've put in the bank, because none of it will buy you out of the terrible circumstances that will come about.

IMAGE: Wikimedia Commons
Last updated: Dec 19, 2013

ERIK SHERMAN | Columnist

Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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