[RC] Re-Inventing capitalism, Part 2 (John Mackey)

[Dr. Ernie Prabhakar]

Hi all,

One more, making a nice hat trick -- or in this case, Hat Tip to Dan  
Weintraub:

http://www.sacbee.com/static/weblogs/insider/archives/002264.html
> this fantastic debate among Milton Friedman, John Mackey and T.J.  
> Rodgers about business and social responsibility. Friedman is the  
> Nobel Prize winning economist. Mackey is the founder and CEO of  
> Whole Foods. Rodgers is the co-founder and CEO of Cypress  
> Semiconductor. The exchange is from Reason Magazine.
Very relevant stuff.  I particular loved this from Mackey:

> The business model that Whole Foods has embraced could represent a  
> new form of capitalism, one that more consciously works for the  
> common good instead of depending solely on the “invisible hand” to  
> generate positive results for society.
I was particularly surprised to see this statement (again from Mackey):

> Business social responsibility should not be coerced; it is a  
> voluntary decision that the entrepreneurial leadership of every  
> company must make on its own. Friedman is right to argue that  
> profit making is intrinsically valuable for society, but I believe  
> he is mistaken that all businesses have only this purpose.
An interesting, almost radical middle approach.  He denies the right  
of the state to coerce responsibility, but affirms the right of  
leadership to pursue responsibility.  And appears to agree with  
Friedman that profit maximization is intimately tied up with overall  
value-creation -- but makes a much better story:

> If we are truly interested in spreading capitalism throughout the  
> world (I certainly am), we need to do a better job marketing it. I  
> believe if economists and business people consistently communicated  
> and acted on my message that “the enlightened corporation should  
> try to create value for all of its constituencies,” we would see  
> most of the resistance to capitalism disappear.
I wonder if rather than re-inventing capitalism, what we (at least  
Billy and I, and arguably John Mackey) want is to *refine*  
capitalism.  That is:

a) Characterize it in a way that better reflects the underlying  
entrepreneurial innovation, not mere financial accounting

b) Denies those on the Right who think profit-maximization entitles  
(or requires) businesses to deny altruistic impulses

c) Defends against those on the Left who think "social  
responsibility" gives *them* the right to dictate terms to business  
owners

In this view, the proper role of government -- and other stakeholders  
-- is to *help* business owners "see" what is morally right, so that  
they "voluntarily" do it.  Not coerce them, nor conversely to let  
them off the hook.

Which, oddly, is very close to what I blogged about today in Nehemiah:

http://homepage.mac.com/drernie/iblog/B48962342/C1715611479/ 
E20051003081904/index.html

> "voluntary submission to community in the presence of manifest  
> virtue."
>
> Let that sink in for a minute. Socialists hate the idea of  
> "voluntary", Libertarians the idea of "submission", and secularists  
> "virtue." For that matter, the whole thing makes me squirm. :-)  
> Yet, I suspect all three are actually necessary for the system to  
> work.
and posted about on a philosophy list, regarding utilitarianism:

http://www.calvin.edu/archive/scp/200510/0012.html

> The virtuous life is one which, at least in the long term, will   
> necessarily maximize both:
>         a) personal happiness
>         b) societal good
Which in fact gets to one of the central misunderstanding underlying  
the the debate, which I would phrase as:

"Sufficiently enlightened self-interest is indistinguishable from  
sufficiently rational altruism."

Those who want to defend one and attack the other typically define  
one more narrowly and the other more broadly.  This is not in itself  
surprising.  What is surprising is that none of the players seem the  
least bit aware that they are doing so.

-- Ernie P.

P.S. Interestingly, despite their Cato-esque Libertarian leadings, I  
just Googled into Reason magazine this weekend because of their  
support for the NAF's vision of mandatory private health insurance.

http://www.reason.com/0510/fe.mf.rethinking.shtml

= John Mackey =

In 1970 Milton Friedman wrote that “there is one and only one social  
responsibility of business—to use its resources and engage in  
activities designed to increase its profits so long as it stays  
within the rules of the game, which is to say, engages in open and  
free competition without deception or fraud.” That’s the orthodox  
view among free market economists: that the only social  
responsibility a law-abiding business has is to maximize profits for  
the shareholders.

I strongly disagree. I’m a businessman and a free market libertarian,  
but I believe that the enlightened corporation should try to create  
value for all of its constituencies. From an investor’s perspective,  
the purpose of the business is to maximize profits. But that’s not  
the purpose for other stakeholders—for customers, employees,  
suppliers, and the community. Each of those groups will define the  
purpose of the business in terms of its own needs and desires, and  
each perspective is valid and legitimate.

...In my marriage, my wife’s happiness is an end in itself, not  
merely a means to my own happiness; love leads me to put my wife’s  
happiness first, but in doing so I also make myself happier.  
Similarly, the most successful businesses put the customer first,  
ahead of the investors. In the profit-centered business, customer  
happiness is merely a means to an end: maximizing profits. In the  
customer-centered business, customer happiness is an end in itself,  
and will be pursued with greater interest, passion, and empathy than  
the profit-centered business is capable of.

Not that we’re only concerned with customers. At Whole Foods, we  
measure our success by how much value we can create for all six of  
our most important stakeholders: customers, team members (employees),  
investors, vendors, communities, and the environment


If you feel altruism towards other people, you should exercise that  
altruism with your own money, not with the assets of a corporation  
that doesn’t belong to you.

This position sounds reasonable. A company’s assets do belong to the  
investors, and its management does have a duty to manage those assets  
responsibly. In my view, the argument is not wrong so much as it is  
too narrow.


I believe the entrepreneurs, not the current investors in a company’s  
stock, have the right and responsibility to define the purpose of the  
company. ... It is the entrepreneurs who set the company strategy and  
who negotiate the terms of trade with all of the voluntarily  
cooperating stakeholders—including the investors. At Whole Foods we  
“hired” our original investors. They didn’t hire us.


The shareholders of a public company own their stock voluntarily. If  
they don’t agree with the philosophy of the business, they can always  
sell their investment, just as the customers and employees can exit  
their relationships with the company if they don’t like the terms of  
trade. If that is unacceptable to them, they always have the legal  
right to submit a resolution at our annual shareholders meeting to  
change the company’s philanthropic philosophy

But the fact that Whole Foods has responsibilities to our community  
doesn’t mean that we don’t have any responsibilities to our  
investors. It’s a question of finding the appropriate balance and  
trying to create value for all of our stakeholders.

Corporate philanthropy is a good thing, but it requires the  
legitimacy of investor approval.

read Smith’s other great book, The Theory of Moral Sentiments. There  
he explains that human nature isn’t just about self-interest. It also  
includes sympathy, empathy, friendship, love, and the desire for  
social approval. As motives for human behavior, these are at least as  
important as self-interest. For many people, they are more important.

Whole Foods gives money to our communities because we care about them  
and feel a responsibility to help them flourish as well as possible.

The business model that Whole Foods has embraced could represent a  
new form of capitalism, one that more consciously works for the  
common good instead of depending solely on the “invisible hand” to  
generate positive results for society.

To extend our love and care beyond our narrow self-interest is  
antithetical to neither our human nature nor our financial success.  
Rather, it leads to the further fulfillment of both

= Milton Friedman =

The differences between John Mackey and me regarding the social  
responsibility of business are for the most part rhetorical. Strip  
off the camouflage, and it turns out we are in essential agreement

I shall try to explain why my statement that “the social  
responsibility of business [is] to increase its profits” and Mackey’s  
statement that “the enlightened corporation should try to create  
value for all of its constituencies” are equivalent.

Maximizing profits is an end from the private point of view; it is a  
means from the social point of view.

= T.J. Rodgers =

A more accurate title for his [Mackey] article is “How Business and  
Profit Making Fit Into My Overarching Philosophy of Altruism.”

It is also simply good business for a company to cater to its  
customers, train and retain its employees, build long-term positive  
relationships with its suppliers, and become a good citizen in its  
community, including performing some philanthropic activity. When  
Milton Friedman says a company should stay “within the rules of the  
game” and operate “without deception or fraud,” he means it should  
deal with all its various constituencies properly in order to  
maximize long-term shareholder value.

He does not mean that a company should put every last nickel on the  
bottom line every quarter, regardless of the long-term consequences.

But Mackey’s subordination of his profession as a businessman to  
altruistic ideals shows up as he attempts to negate the empirically  
demonstrated social benefit of “self-interest” by defining it  
narrowly as “increasing short-term profits.”

But I balk at the proposition that a company’s “stakeholders” (a term  
often used by collectivists to justify unreasonable demands) should  
be allowed to control the property of the shareholders.

= John Mackey's Rebuttal =

In contrast to Friedman, I do not believe maximizing profits for the  
investors is the only acceptable justification for all corporate actions

“I believe the entrepreneurs, not the current investors in a  
company’s stock, have the right and responsibility to define the  
purpose of the company.”

these goals are neither “hypocritical” nor “cloaking devices” but are  
intrinsic to the purpose of the business.

Business social responsibility should not be coerced; it is a  
voluntary decision that the entrepreneurial leadership of every  
company must make on its own. Friedman is right to argue that profit  
making is intrinsically valuable for society, but I believe he is  
mistaken that all businesses have only this purpose.

While Friedman believes that taking care of customers, employees, and  
business philanthropy are means to the end of increasing investor  
profits, I take the exact opposite view: Making high profits is the  
means to the end of fulfilling Whole Foods’ core business mission. We  
want to improve the health and well-being of everyone on the planet  
through higher-quality foods and better nutrition, and we can’t  
fulfill this mission unless we are highly profitable. High profits  
are necessary to fuel our growth across the United States and the  
world. Just as people cannot live without eating, so a business  
cannot live without profits. But most people don’t live to eat, and  
neither must a businesses live just to make profits.

He argues that maximizing profits is a private end achieved through  
social means because it supports a society based on private property  
and free markets. If our two statements are equivalent, if we really  
mean the same thing, then I know which statement has the superior  
“marketing power.” Mine does.

Both capitalism and corporations are misunderstood, mistrusted, and  
disliked around the world because of statements like Friedman’s on  
social responsibility. His comment is used by the enemies of  
capitalism to argue that capitalism is greedy, selfish, and uncaring.  
It is right up there with William Vanderbilt’s “the public be damned”  
and former G.M. Chairman Charlie Wilson’s declaration that “what’s  
good for the country is good for General Motors, and vice versa.” If  
we are truly interested in spreading capitalism throughout the world  
(I certainly am), we need to do a better job marketing it. I believe  
if economists and business people consistently communicated and acted  
on my message that “the enlightened corporation should try to create  
value for all of its constituencies,” we would see most of the  
resistance to capitalism disappear.

Why talk only about maximizing profits for the investors? Doing so  
harms the brand of capitalism.

Like individuals living in communities, businesses make valuable  
social contributions by providing goods and services and employment.  
But just as individuals can feel a responsibility to provide some  
philanthropic support for the communities in which they live, so too  
can a business. The responsibility of business toward the community  
is not infinite, but neither is it zero.

The bottom line is that Whole Foods stakeholder business philosophy  
works and has produced tremendous value for all of our stakeholders,  
including our investors.

Like medicine, law, and education, business has noble purposes: to  
provide goods and services that improve its customers’ lives, to  
provide jobs and meaningful work for employees, to create wealth and  
prosperity for its investors, and to be a responsible and caring  
citizen.

Businesses such as Whole Foods have multiple stakeholders and  
therefore have multiple responsibilities. But the fact that we have  
responsibilities to stakeholders besides investors does not give  
those other stakeholders any “property rights” in the company,  
contrary to Rodgers’ fears. The investors still own the business, are  
entitled to the residual profits, and can fire the management if they  
wish. A doctor has an ethical responsibility to try to heal her  
patients, but that responsibility doesn’t mean her patients are  
entitled to receive a share of the profits from her practice.

The ideas I’m articulating result in a more robust business model  
than the profit-maximization model that it competes against, because  
they encourage and tap into more powerful motivations than self- 
interest alone. These ideas will triumph over time, not by persuading  
intellectuals and economists through argument but by winning the  
competitive test of the marketplace. Someday businesses like Whole  
Foods, which adhere to a stakeholder model of deeper business  
purpose, will dominate the economic landscape. Wait and see.