Why capitalism is so despised
It’s based on greed, selfishness and the exploitation of workers in the pursuit of maximising profit. It promotes short-term wealth creation and extraordinary levels of compensation for some bankers and CEOs. It capitalises on what are not the essential needs of human beings, turning us into wasteful mass consumers.
Capitalism has become despised by some, but is it guilty of these crimes? I’m going to take a closer look.
It exploits ordinary hard working people
Ever since the industrial revolution, capitalism has been accused of exploiting the vulnerable. Famous author Charles Dickens hated it so much that he published “Hard Times”, a novel set in fictional city Coketown, where protagonist Mr Gradgrind, abused his workers and made children work in the mines. Capitalism here was portrayed as supporting appalling conditions for the worker. Fast forward in time and things don’t seem to have changed much today in some emerging markets.
However, Adam Smith – the grandfather of modern-day economics – had a different view. In his book “The Wealth of Nations” published in 1776, he argued that capitalism challenges the evilness of slavery through simple economics. The cost of buying and maintaining slaves, far exceeds the cost of wages, and violence is much less of an incentive than money for a worker. In his view, capitalism actually liberates the worker.
Capitalism he explained is guided by an invisible hand that maximises a person’s profit, which inadvertently benefits society, providing goods that people want and need. However, this “trickle down” effect of wealth is a hard-sell in a world where inequality is still very much an issue, even in the developed world.
Nonetheless, this doesn’t explain why some people in society – especially some of those in the financial sector – earn disproportionally more than ordinary people who work in the real economy. We constantly hear in the news about CEOs who award themselves huge bonuses, while laying of staff to minimise costs and doing little to deliver actually shareholder value.
So what has capitalism got to say for itself?
Crunching the numbers
Let’s look at what the emergence of free-enterprise capitalism two centuries ago has actually led to. I’ve taken these statistics from John Mackey and Raj Sisodia’s book “Conscious Capitalism”:
It’s pretty astounding. It appears free enterprise, combined with property rights, innovation, the rule of law and democratic government, results in a much more wealthy society.
So why all the hate?
Nothing in human creation has had a greater positive impact on more people more rapidly than free-enterprise capitalism. It has been extremely successful.
The United States was far more economically dynamic than the now failed Soviet Union. And, communist China today – well that’s just capitalism by stealth.
It has improve our quality of life tremendously. It’s promoted innovation and social co-operation on a scale never seen before in human history. We now have the freedom to enjoy life. This isn’t gluttony or out of control mass consumption. This is genuine improvement in our quality of life.
The problem isn’t free-enterprise capitalism. It’s our flawed interpretation of it.
Poor business practice
When Herb Keller, the former CEO of Southwest Airlines said, “employees come first”, he shocked the business community. Surely he meant the shareholders.
He led a company famed for its company culture and cult-like customer loyalty, returning astounding shareholder value under his tenure. It was even used as a case study in Jim Collins book, “Good to Great“.
His philosophy was simple. Well-treated employees will serve customers well. These customers spend more, increasing profits, making shareholders happy. It’s a modern day example of what Adam Smith argued 1776.
Putting profits first is not free-enterprise capitalism. It is poor shortsighted management practice because you have got to take care of the company too. The majority of successful entrepreneurs are not driven by just maximising profits. It’s the business they believe in and the product or services they provide that often motivates them. Profit is just the reward for being successful and right.
As investors, we can challenge bad corporate management. We can look beyond the balance sheet and income statements and really believe in the spirit of the companies we invest in. We should make sure they take care of their employees properly because it is just common sense – without them there is no company to run.
Therefore, it is not capitalism that we should despise. It those people who deviate from its true spirit.
This is why I’m a capitalist.
