🍿 Food for Thought: Can We Fix Capitalism?
Today, we raise a very important question: Who should capitalism serve?
The multi-billion-dollar and even trillion-dollar corporations that have emerged in the 21st century have led to several debates about the nature of capitalism.
While some believe capitalism is inherently evil, others believe that it can benefit others but has just lost its way.
But before we discuss this benevolent side of capitalism, let's look at how it emerged.
🤨 How Did Capitalism Come Into the Picture?
From the 12th to 15th CE, societies were so structured that they could take care of their own needs. Within towns, industries were organised into powerful guilds, which aimed to limit production to ensure it didn’t exceed demand. Only guild members could produce and sell goods in the region.
In this type of economy, the money in circulation was low and trade was limited and existed to satisfy basic human needs.
But humans wanted more. We always do.
This feudal way of life started to disenchant people and thus a new way of trade started shaping up. There was a boost in the foreign trade by the merchant class. The merchants bought cheaper foreign goods and sold them in their domestic regions for high-profit margins. They started to boost trade by establishing colonies (you already know how that turned out for us).
And very slowly, the merchants became a link between the consumer and producer.
And with the advent of the Industrial Revolution in the 18th century, they began to dominate the producers and the concept of waged workers entered the scene. This was the final stage of transition from a merchant (making money from trade), to a capitalist (deriving wealth from the ownership and control of the means of production).
This control over the means of production led to the emergence of communism. They demanded that the means of production should be owned by the whole community and not by a few. This tussle between capitalism and communism continues to date.
Even though we have embraced capitalism, there happens to be a small debate about its priorities. The capitalist paradigm can either focus on the shareholders or on the stakeholders.
👀 Shareholders v/s Stakeholders
A shareholder is a person, institution, or company that holds at least one share of the company’s stock. For example, if you buy one stock of Reliance Industries, you become a shareholder of that company. You become a part-owner of Reliance and you are entitled to returns based on the profits that the company makes.
A stakeholder, however, is any person or organisation that can get affected by the business’ activities directly or indirectly. This includes the company's customers, employees, suppliers, and so on. For example, you supply fabrics to Reliance, so you are directly affected by the policies undertaken by the company. Let’s say, you own a house in the locality that has a Reliance factory. You don’t work in the factory but you will be indirectly affected if that factory closes down. In both these cases, you are the stakeholder.
Now, before 1970, capitalism was flourishing and for the most part, both stakeholders and shareholders were benefiting from it.
But in 1970, one idea changed the course of the entire world as we know it.
Nobel Prize-winning economist Milton Friedman proposed corporations should focus on one single goal: increasing the wealth of shareholders.
His logic? Companies were basically created for benefiting the shareholders and so, they should focus on growing their money and nothing else can take precedence.
The idea caught on like wildfire in the West, especially in the US. Inhumane policies like cutting wages of labourers in half could now be easily justified as “prudent financial practices.”
Companies across the world adopted this as their guiding motto. And shareholder capitalism was born.
Following this, all the companies' decisions were guided by only one purpose: maximising profit.
They polluted the environment to make cheaper raw materials.
They bribed government officials to fast-track illegal procedures.
They infringed patents frequently.
They did everything possible, however unethical, to give back hefty returns to the shareholders.
And sadly, they were successful at it too.
Did these activities benefit anyone other than the shareholders?
No.
It just made companies more powerful and led to the accumulation of wealth in the hands of a few, especially because most founders were the companies' biggest shareholders.
💡 Enter, A New Idea
R. Edward Freeman began pondering over questions like: “who should benefit from capitalism” and decided to change this self-centered course of action. He advocated a model that serves the long-term interests of the company. He believed that all the stakeholders, and not just the shareholders, should be considered while taking decisions for the company. This idea requires businesses to become more responsible. And it is now gaining popularity. Why?
For two reasons mainly.
First, the whole world is realising how badly capitalism and profit-hungry capitalists have been destroying our planet and contributing to climate change which now threatens our very survival.
Second, employees now are more woke and aware of their rights, thanks to social media and the rapid exchange of information it has allowed. We can now come together and hold companies accountable for their mistakes.
And this has made many corporations realise that ultimately the people who work for them and buy from them, are the ones that matter.
Plus, studies have suggested that considering the long-term impact of your company can actually help it perform better!
So many major corporations, including BlackRock, one of the world's biggest asset management firms, have embraced stakeholder capitalism.
🤔 How Can Companies Put Stakeholders First?
By putting the people and the planet ahead of profits.
For this, they need to establish a well-rounded environmental, social and corporate governance strategy. This would include ways to reduce damage to the environment, perhaps by reducing emissions and embracing renewable energy sources. Or taking part in initiatives like planting more trees. Many Indian companies like Mamaearth are taking such initiatives.
Plus, companies should also focus on ensuring the physical, mental, and economic well-being of their employees. This can be done in several ways like ensuring they get proper wages, regular leaves, better training and development, and so on.
Not just that, companies should also take a stand on political and social issues that impact their stakeholders. For instance, last year Coca-Cola spoke out against voter suppression laws in Georgia, US, where the company's office is based.
So, you see companies are realising that they cannot just continue being money-hungry organisations that keep exploiting resources.
They have understood that shareholders will always ask for more profits, but it is the responsibility of the management to take decisions that serve the long-term interests of the company. Getting away with environmental pollution for a few years might jack up the company’s stock price, but the same pollution will affect the staff indoors in the long run.
We still have a long, long way to go.
Stakeholder Capitalism makes sense. It’s an idea that’s waiting to catch on. We are already seeing early shoots of this as the number of social enterprises and social entrepreneurs grow.
Technology is playing a pivotal role here as well - with DAOs coming into the picture, it has become easier to vote on smaller, erstwhile insignificant matters of the organisation as well.
The world needs to become more balanced for harmony to prevail, democratisation of both “skin in the game” and “say in the game” has to happen, and Team ReadOn unequivocally vouches for this new dawn of capitalism.
⚡ In a line: Shareholder capitalism has long been the unquestioned way of doing business; it is time for a new and more inclusive form of capitalism that keeps in mind benefits for all stakeholders to prevail.
💡 Quick question: Which form of capitalism do you think makes more sense: Shareholder Capitalism or Stakeholder Capitalism? Let us know in the comments.
Noob’s Corner: Capitalism is an economic system that focuses on owning and controlling property and earning profits. In this system, the power and the cash are usually concentrated in the hands of a few. Winner takes all. Basically, our current economic system.
Communism is a philosophy that says that power should belong to the workers and not their employers. It states that a company's profits should be divided equitably among all.
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