Building a Better Brand of Capitalism

If the benefits of capitalism are good for one, they would be even better for all.

In a Wall Street Journal article (July 28, 2012 ), “Why Capitalism Has an Image Problem,” the writer argued that the only thing wrong with capitalism is that it has an “image problem.” Indeed it does, but the Journal errs when it suggests that the problem exists because people just don’t understand the value of capitalism and that it can be corrected by some slick public relations campaign. It’s not that people don’t understand capitalism; it’s that capitalism does not understand people.

Capitalism has been at the core of the American financial system; driving it to starry heights of economic performance unmatched in history. For all its faults, there is no question that capitalism is the most democratic, efficient and effective business system yet devised by man.

Capitalism, in fact, is really a synonym for “individual freedom,” because it allows – indeed encourages – individuals who have an idea and the courage to risk it all to “go for it” in hopes of achieving the dream of economic reward and freedom. But maybe the globalization of economies, combined with the sluggishness, stagnation and moral corruption of “crony capitalism” now rampant in American business (where the rich take care of the rich at the expense of others) are indications that the capitalism we have known is becoming obsolete. If American is to continue its world economic leadership, there may be a need for a new brand of capitalism.

Remembering the Henry Fords and John D. Rockefellers

The classic image of capitalism is that of the “rugged individual,” motivated to take risk and driven to use experience, creativity, diligence and perseverance to virtually singlehandedly build a great business empire that affords economic freedom for themselves and their families.

This is referred to as “individual capitalism” and it worked well in the early stages of economic development in this country, a time when huge amounts of capital were needed to invest in the infrastructure of the economy. The system called for strong, domineering, egocentric entrepreneurial individuals who would bravely step forward to invest the needed capital, take the risks and receive the rewards. This brought about the attitude expressed by many that it is the individual entrepreneur who is solely responsible for the success of a business; excluding all others from the benefits of capitalism.

The old model for capitalism also viewed the workers not as individuals, but as objects of production, cogs of the system if you will, who needed to be tightly monitored, directed and controlled. Much like other materials and resources of production, workers were considered “human resources” who could be hired, fired or outsourced as it benefited the business. (It was this attitude that gave rise to “efficiency experts” and “time-and-motion” studies, because workers were looked upon as just “another machine” that could be engineered for productivity.) But those are outmoded concepts that need to change if capitalism is to survive.

What America needs today is a new brand of capitalism called “collaborative capitalism.”

The good news is that “collaborative capitalism” would be easy to adopt since its principles are based on concepts of “individual capitalism” that have already been proven. The most difficult challenge to adopting this new brand of capitalism would be to overcome the old-fashioned thinking – still held by many today – that success under capitalism is achieved through the singular effort of the “rugged individual” and not as a result of a collective effort.

Traditionally, the rewards of capitalism went to those who put at risk the capital needed to fund the business. That same principle should apply to the new brand of capitalism, but what needs to change is the definition of “capital.” That concept should be broadened to include not just money, but also the talent, experience and the ability of the worker to add value to the organization. This is often referred to as “sweat equity;” meaning that experience, talent and effort are worth as much as money contributed to an organization. It can be argued that in today’s world, the value of this new “capital” is more scarce and valuable than the old idea of capital; at least they are on a par.

New Times Demand Change

The time is right for a new brand of capitalism, because the core of the American economy has been transformed from making to thinking. Manufacturing as a percentage of the total economy has declined from almost 25 percent in 1970 to just over 10 per cent in 2010. At the same time, in 2010, the services sector – which includes scientific, technical, finance, retail and technology – made up 67.8 percent of total GDP. Clearly the nature and structure of the American economy has changed and capitalism needs to change to keep pace and remain relevant.

The fundamental precept of capitalism is the incentive to achieve freedom of action and economic security that motivates an individual to take a risk, work hard and create value. We know from experience that this incentive works for the individual who has risked the old type of capital, so why shouldn’t it work for those who risk the new type of capital? For a company to be successful today, workers need to be more than automatons performing tasks in a time-and-motion model. In an economy based more on thinking than making, the success of an organization is dependent on the “capital” contributed by workers when they are creative, innovative, self-directed and involved.

This leads to what should be the new rule for capitalism:

Those with the ability to add value (new capital) to an organization will be encouraged to do so when they are allowed to share in the value they help create.

The adoption of this rule would do more than improve the “image” of capitalism; it would transform capitalism into a modern economic system that is more efficient, effective and inclusive than the old system. Capitalism would become relevant, not just for the few, but also for the many.

Making it Work

Actually, it would be a simple process to implement collaborative capitalism. Just as those who contributed capital in the past received shares of stock representing ownership in the organization, those who contribute the new form of capital – the employees – would receive shares of stock representing their ownership in the organization.

This is not the same as stock options or stock grants, usually offered to top management. Nor does it envision universal ESOPs (employee stock ownership plans) that represent only indirect ownership and have often been used by management to maintain control. What is being proposed here is honest-to-goodness real and direct stock ownership “purchased” by all employees as part of their total compensation. Employees would be compensated in two forms: Cash for the tasks they perform and stock for the capital they contribute. To maintain the integrity and honesty of the new collaborative capitalism, the class of stock owned by management, outside investors and employees must be the same.

There are many advantages to be gained by adopting collaborative capitalism:

  • It creates “parallel interests” for management, employees and outside investors. One group does not benefit unless all benefit. It encourages everyone to work for the benefit of the whole.
  • It offers all the great benefits and incentives of the old style individual capitalism – freedom and economic security – to all involved in the ultimate success of the organization; not just a few.
  • Employees naturally become more loyal and dedicated to the success of the organization, because they don’t just have a job, but are real capitalists who own their job.
  • It would eliminate the corrosive elements of collusive capitalism that has pitted the haves against the have-nots, because all will become the haves.
  • It will re-energize a new middle-class that will prosper not just as workers, but as capitalists themselves.

Adopting a form of collaborative capitalism does not mean workers will manage the organization, any more than shareholders run companies now. But in addition to doing their job, it offers workers the same respect, information and input afforded to other owners, because they are also owners. Nor does this new brand of capitalism eliminate the need for strong, individual leadership, but it does channel this leadership for the benefit of all, not just a few.

And the Moral of the Story …

Modern capitalism does have an image problem. More and more people see capitalism in negative –even evil – terms as an economic system that uses exclusion, collusion and immoral (if not illegal) activity designed to accumulate power and wealth in the hands of fewer and fewer, at the expense of all others. The problem is not with capitalism, but with those who have failed to recognize the changing environment for capitalism or have consciously corrupted the concept of capitalism.

The solution is not to eliminate, restrict or regulate capitalism, but to take advantage of the natural benefits of capitalism – individual freedom and economic security – by expanding capitalism. If capitalism is good for the few, it would be even better for the many. Capitalism should be expanded by recognizing that there is a new form of “capital” needed by today’s “thinking” organizations and that success is achieved by the collective efforts of many who work in parallel to share the benefits of real capitalism.

Collaborative capitalism will not only improve the image of capitalism, it will save it.

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