I have posed above strikes me as being delightfully ambiguous. It could be asking
what happened to bring to an end the era in which creative capitalism brought
about high rates of productivity growth. Alternatively, it could be asking what
happened to the concept of “creative capitalism” that Bill Gates presented to
the World Economic Forum (WEF) in 2008.
here is on the second interpretation, but I will end up discussing what has
happened to the creativity of capitalism in the more traditional sense.
Why am I
interested in the particular form of corporate social responsibility (CSR) that
Bill Gates referred to as “creative capitalism”? I don’t hear the Gates concept
being much talked about these days, but I think that variants of this form of
CSR have become more common over the last decade or so. It is worth considering
whether Gates’ approach to CSR is changing corporate sectors in ways that may
directly hamper the traditional creativity of capitalism, or indirectly hamper
it via impacts on economic policies pursued by governments.
That is why I decided that the time had come to read Creative Capitalism, a book edited by Michael Kinsley, which was published in 2008. The book consists mainly of comments by eminent economists on the “creative capitalism” concept that Bill Gates presented to the WEF. I should confess at this point that deciding to read the book didn’t require me to judge that it might be worth buying. A copy was given to me last year by a friend who was downsizing his library. The book was sitting in my “unread” pile for many months waiting for me to show some interest. I am now glad I read it!
In the next
section I will outline Gates’ concept and briefly discuss the different
reactions of economists writing 14 years ago. That will be followed by consideration
of possible consequences of changes in the nature of capitalism that seem to stem
from Gates’ concept and similar ideas.
advocated a new approach to capitalism in which businesses would give more
attention to recognition and reputation. As he put it:
enhances a company’s reputation and appeals to customers; above all it attracts
good people to the organisation. As such, recognition triggers a market-based
reward for good behavior.”
advanced this view in the context of considering how self-interest could be
harnessed to provide more rapid improvement in the well-being of poor people.
However, pursuit of recognition seems to have become a strong motivator for the
environmental and social objectives that are increasingly espoused by
corporates. Gates does not mention the potential for pursuit of recognition for
good behavior to have a positive influence on investors, but that also seems to
have emerged as an important factor in recent years.
My review of
the contributions of commentators is highly selective. I just focus here on
what I see as the main points that were raised.
Some of the
commentators suggested that entrepreneurs with philanthropic objectives might
do better to do what Gates did, rather than to follow the approach he advocated
in his speech to the WEF. Like some others before him, Gates pursued profits
until he become extraordinarily wealthy and then established a foundation to
pursue philanthropic objectives. An argument in support of that approach is
that the pursuit of multiple “bottom lines” by companies adds to the difficulty
of measuring their performance to ensure that executives can be held
accountable for outcomes.
the commentators referred to Milton Friedman’s view, in Capitalism and
Freedom, that CSR is a “fundamentally subversive doctrine” because,
in a free society, “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” (p 133).
others pointed out that Gates’ proposal is consistent with a free society
because he was suggesting that corporates can obtain a market-based reward for
choosing to pursue non-pecuniary objectives of employees and consumers.
Similarly, it is consistent with a free society for companies to seek to pursue
non-pecuniary objectives of the shareholders who own them.
It is likely
that an increasing tendency for corporates to pursue non-pecuniary objectives
would have a negative impact on measured productivity growth. However, that may
be largely a problem in the measurement of productivity. Measures of
productivity growth are biased to the extent that output indicators do not incorporate
non-pecuniary goods that contribute human flourishing. If corporates are
efficient vehicles for the pursuit of the non-pecuniary objectives of their
shareholders, employees, and customers, it seems reasonable to suppose that
pursuit of those objectives would contribute to the flourishing of the people
if a company is not an efficient vehicle for the pursuit of the non-pecuniary
objectives of its shareholders, employees, and customers?
considering this question it is important to recognize that corporate sectors
consist of large numbers of individual firms which compete for labor, capital,
and customers. Individual firms are free to give different weight to different
objectives. Some may see their only role as profit maximization, and may even
seek recognition by asserting that they see that as a social responsibility. Others
may seek a reputation for social responsibility by undertaking marketing exercises,
without changing their practices. At the other extreme, some companies may devote
themselves largely to pursuit of one or more non-pecuniary objectives,
providing only minimal financial returns to shareholders.
customary for economists to assert that the market is capable of weeding out
firms that are following inefficient strategies. Applying the usual market test,
it appears reasonable to suppose that if individual companies pursuing the non-pecuniary
objectives of workers, consumers, and shareholders are able to survive, the
strategies they are following must pass the market’s efficiency test.
quote at the top of this article is followed by his assertion that the argument
for liberty rests on “the belief that it will, on balance, release more forces
for the good than for the bad” (Constitution of Liberty, p 31). In
considering how best to describe the spontaneous order of a free society, Hayek
later suggested that capitalism “is an appropriate name at most for the partial
realization of such a system in a certain historical phase, but always
misleading because it suggests a system which mainly benefits the capitalists,
while in fact it is a system which imposes upon enterprise a discipline under
which the managers chafe and which each endeavours to escape” (“Law,
Legislation, and Liberty”, V1, p 62)
in the real world at present, the ability of the market to weed out inefficient
firms and the strategies they adopt is greatly hindered by government
intervention and expectations of future government intervention. If firms believe
that pursuit of certain goals will be rewarded by governments, they have an
incentive to establish reputations for pursuing those goals. Firms also have an
incentive to seek government assistance as a reward for good behavior. The increasing
prevalence of such interactions has led to the development of corporatist,
rent-seeking cultures that have contributed to a long-term decline in rates of
productivity growth in high-income countries.
It is also
important to note that, in the realm of politics, what some people view as good
behavior is often viewed in a different light by others. For example, political
opinions differ on whether or not it is good for pension funds to take account
of environmental policies in their allocation of funds. Investors are often
uncertain about which view will prevail in the political arena. Such economic
policy uncertainty adds to the normal commercial risks of investment. An
example which comes readily to mind is the impact of policy uncertainty on future
investment in gas-fired electricity generation in industrialized countries. Normal
commercial considerations might suggest that is likely to be a profitable
investment to meet demand for electricity when the wind is not blowing and the
sun is not shining, but investors have to contend with the possibility that further
regulatory interventions to discourage use of fossil fuels will render such
investment unprofitable. It is reasonable to predict that blackouts will be more
common in jurisdictions where such policy uncertainty prevails.
ideologies of governments also seem to be changing in ways that make it more
difficult for markets to weed out firms adopting inefficient strategies. Over
the last decade or so, the progressive side of politics has encouraged
corporates to establish reputations for “woke progressivism”. That seems to
have induced political conservatives to become increasingly disenchanted with corporates.
That disenchantment has added to the antagonism associated with the increased
tendency of many conservatives to espouse economic nationalism and populist
views opposed to the corporate sector’s interest in free trade, international
capital mobility, and technological progress.
comes to play an increasing role in the investment decisions of businesses, economic
growth rates of industrialized countries are likely to decline. Since
governments find it difficult to disappoint the expectations of voters, government
spending is unlikely to be constrained to a correspond extent. Major economic
crises seem likely to become more common. (I have discussed these issues more
fully in Chapter 6 of Freedom,
Progress, and Human Flourishing.)
after the passage in which Milton Friedman suggested that the social
responsibility of business was to serve the interests of stockholders, he
suggested that the social responsibility of union leaders is to serve the
interests of their members. He then went on to write:
“It is the
responsibility of the rest of us to establish a framework of law such that an
individual in pursuing his own interest is, to quote Adam Smith … “led by an
invisible hand to promote an end which was no part of his intention. …” (Capitalism
and Freedom, p 133).
it seems likely that major economic crises will need to be endured before
governments of industrialized countries once again see merit in confining themselves
to core responsibilities in the manner that Adam Smith suggested.
are increasingly choosing to adopt strategies to improve their reputations with
employees, customers, and investors who have interests in social and
environmental issues. That would not pose a problem in the context of the
spontaneous order of a free society. Pursuit of multiple objectives may add to
problems in holding executives accountable for an individual firm’s performance,
but free markets are capable of weeding out firms that follow inefficient
however, industrialized countries are now corporatist quagmires in which the
ability of markets to weed out firms that adopt inefficient strategies is
greatly hindered by government intervention and expectations of future government
intervention. The obvious solution is to reduce government intervention in
markets, but major economic crises will probably need to be endured before that