[RC] The Purpose of Business: Sustainable Capitalism

[Dr.Ernie Prabhakar]

Hi all,

After all that "re-invention", I think I finally figured out the big  
(but subtle) lie behind neo-classical economics.  And the hidden  
truth that had obscured.

The standard formulation is:

I-A.  The purpose of business is to create value for shareholders

which is interpreted as:

I-B: The purpose of business is to maximize profits

Pretty much everyone (both for and against) treat I-A and I-B as  
equivalent and interchangeable.

But, I just realized that I-A is, in reality, either i) false, or ii)  
useless -- depending on how you interpret it.   And that the  
centuries-long defense of that proposition depends crucially on  
swapping between those two interpretations without anyone noticing.   
Plus the lack of a viable alternative, of course.

For example, if you interpret I-A and I-B naively, one can justify  
all sorts of foolish short-term behavior: abusing employees, pumping  
up quarterly profits at the expense of trust, etc.   Of course,  
defenders of capitalism will (rightly) point out that such an  
interpretation is false: those behavior clearly destroy shareholder  
value in the long term.

But if that's so, then why don't they say that explicitly? This leads  
to:

II-A.  The purpose of business is to sustainably create value for  
shareholders

Many neo-classicals would be uncomfortable with this, but it is the  
only logical alternative if the naive interpretation is false.  I  
would love to see anyone suggest otherwise.

However, while this statement is no longer false, it is largely  
useless, almost tautological, like saying "A successful business is  
one which succeeds."  A more actionable, but otherwise equivalent  
statement, would be:

II-B.  The purpose of business is to sustainably create value for all  
stakeholders
(i.e., customers, employees, investors, suppliers, distributors,  
leadership)

This in fact represents the reality that *real* businesspeople (as  
opposed to academic economists) have to deal with all the time.   You  
have to keep everybody a little bit happy, but not focus on one group  
to the extent of destroying the business. This both validates the  
insight of I-A and yet places it within a larger context.

I call this "Sustainable Capitalism", even though I'm sure the term  
has been used/abused elsewhere.  The key, though, is that the owners  
of capital are the ones responsible for using it sustainably -- NOT  
the government or gadflies.   This is a voluntary creative act, like  
all other entrepreneurship. But it is explicitly directed towards  
moral, social ends.

This seems both blindingly obvious and completely irrefutable.  Or at  
least it did at 3 AM. :-)

What do you think?

-- Ernie P.