Capitalism on trial: Profit is a good thing — except to the political left

These are dangerous times for American capitalism. 

Sen. Elizabeth Warren’s (D-Mass.) Accountable Capitalism Act would oblige large corporations to obtain a federal charter requiring directors to consider the interests of all stakeholders — not only shareholders and customers, but also groups representing society as a whole, such as their employees, local communities and civil society, including non-representative, anti-business NGOs.

The chief justice of the supreme court of Delaware – where more than two-thirds of Fortune 500 corporations have their legal home – has written a book arguing that corporations should be run for the benefit of their workers. The Financial Times has launched a “new agenda” campaign that intones: “Capitalism. Time for a reset. Business must make a profit but should serve a purpose too.”

None of this would have come as a surprise to Joseph Schumpeter, one of the 20th century’s great economists. No one understood better the dynamic, propulsive nature of capitalism. But, unlike most economists, Schumpeter also had a deep, subtle appreciation of capitalism’s cultural effects — that, while a system of free enterprise creates successful and prosperous societies, it also plants seeds that can lead to its own demise. “Unlike  any other type of society,” Schumpeter wrote “capitalism inevitably and by virtue of the very logic of its civilization creates, educates and subsidizes a vested interest in social unrest.” 

And, as Schumpeter saw it, the publicly traded corporation, lacking the visceral allegiance of private property, was capitalism’s weak point: “Defenseless fortresses invite aggression especially if there is rich booty in them.” It’s a prophecy that we’re seeing come to pass. 

Recently, in a letter to the Business Roundtable,181 corporate CEOs disavowed the profit motive and corporate directors’ accountability to shareholders. The CEOs championed a view now widely held: that profit could only be justified for virtuous conduct, that profit should merely be a byproduct of making certain contributions to society. It’s a position that the Business Roundtable already implicitly accepts.

It’s entirely wrong. In fact, the profit that a business earns is a pretty good approximation of its contribution to society. One might think of it in terms of a simple equation: 

Revenue (what people will pay in a competitive market) minus cost (the value of resources used to provide a product or service) equals profit (a first-order indicator of a business’s contribution to society).

Profit is one of the most powerful signaling devices in a free market. In their search for profit, businesses create the dynamic for economic growth — and rising living standards. Is this not a contribution to society, of the most dramatic kind imaginable?

The point is beautifully made in Harvard Business School professor Clayton Christensen’s “The Prosperity Paradox.” Christensen writes of poor, developing nations: “It may sound counter-intuitive, but enduring prosperity for many countries will not come from fixing poverty. By investing in market-creating innovations, investors and entrepreneurs inadvertently engage in nation-building.” Entrepreneurs and businesses don’t have to set out to improve the world — through their collective efforts of making useful goods and services, an improved world is the outcome.

Yet today, the publicly traded corporation is perhaps under greater threat than at any time since the 1930s. Corporations are blamed for the world’s ills: inequality and stagnant income growth, poverty in poor countries, environmental degradation and, of course, climate change. Using business as tools to tackle these problems highlights a deep confusion about the proper domains of democratic politics and of business. Last year, voters rejected climate initiatives in Arizona, Colorado and, for a second time, Washington State. Failing at politics, activists seek to politicize business — which, so the argument goes, must be accountable to vast networks of “stakeholders.” 

American advocates of “stakeholder accountability” miss the implications of their proposals. Shareholders – whatever their nationality – share the same interest in a business’s economic success. In contrast, stakeholders, by definition hugely diverse, have correspondingly diverse and conflicting interests. America has more multinational corporations than any other nation. Around 45 percent of Amazon’s workforce is outside America; 61 percent of Exxon Mobil’s $234 billion operating capital is located outside the United States. Suppose the European Union passes its version of Sen. Warren’s legislation, requiring that American multinationals be held accountable to European stakeholders. Forget trade wars: We could soon have wars over corporate control.

Already, Warren has written to ten CEOs demanding they back her Accountable Capitalism Act. “Commitments are hollow if they are not accompanied by tangible action that provides real benefits to workers and other stakeholders,” she told them.

One of the primary grounds on which those “real benefits” will be evaluated is environmental practices. Though environmentalism has its roots in a wholesale rejection of the Industrial Revolution and capitalism, business leaders have a long history of subscribing to its core tenets — including the premise that resource-fueled economic growth is unsustainable. Robert Anderson, chairman of Atlantic Richfield, helped finance the first Earth Day in 1970 and provided the seed funding for Friends of the Earth, which is no friend of capitalism.

In the late 1960s, the Aspen Institute, which Anderson also chaired, ran programs on the threat of climate change and the steps needed to avoid a planetary catastrophe. A two-day workshop in 1970 concluded that business-as-usual threatened the future of a decent, civilized world. “All insist,” the New York Times reported, “that the human family is approaching a historic crisis which will require fundamental revisions in the organization of society.” 

Sound familiar? The world managed to survive that purported ecological emergency by ignoring it. We would be well served to ignore the similarly pitched appeals being made now. Otherwise, the attempt to solve global warming by intimidating American corporations could bring about Schumpeter’s grim prognosis of capitalism’s downfall.

Rupert Darwall is the author of “Green Tyranny: Exposing he Totalitarian Roots of the Climate Industrial Complex” (2017) and “The Age of Global Warming: A History” (2013). A strategy consultant and policy analyst, he was a special adviser to the United Kingdom’s Chancellor of the Exchequer and co-led a 2007 Vodafone plc shareholder revolt.