When the iconic economist Milton Friedman posited that “The social responsibility of business is to increase its profits,” he was not advocating for a world where corporate sharks devour the vulnerable under the ironclad rule of unchecked capitalism. Rather, he was defending a system that has been under constant criticism, often under the misapprehension that there is no inherent benefit in the capitalist system. Capitalism, in its pure form, is far from being a brutish machinery of exploitation; it is a framework that nurtures innovation, creates prosperity, and, most importantly, facilitates freedom.
To effectively illustrate the essence of capitalism, let us delve into a bit of history. In the 18th century, Adam Smith, the father of modern economics, used the metaphor of an “invisible hand” to depict the workings of the market economy. According to Smith, even if individuals act out of self-interest, they inadvertently contribute to societal good. This line of thought goes back even further – and more radically – to Bernard de Mandeville’s infamous “Fable of The Bees”, which implies that private vices can lead to public benefits.
The birth of the Industrial Revolution can be seen as a testament to Smith’s theory. It brought forth an unprecedented era of prosperity and economic growth, driving societal change at a pace unseen before. Critics of capitalism, however, decry the inequality and environmental degradation that the system supposedly begets. Indeed, capitalism isn’t without its faults, but neither are the alternatives.
Capitalism is – by it’s nature – sustainable
Currently, we have so many of these “inclusive capitalism” or “sustainable capitalism” conferences, fancied by so many rent-seekers, that might seem like a salutary initiative. But upon closer inspection, the semantics become problematic. Inclusive, caring, sustainable capitalism? The adjectives implicitly suggest that capitalism in its inherent form is unfair and uncaring.
This interpretation is as misleading as it is dangerous. To argue against capitalism based on the shortcomings of its worst examples is akin to decrying democracy because of the failings of its least representative systems. It’s important to remember that capitalism isn’t an entity; it’s a principle. A system that allows individuals to trade freely, facilitating progress through competition and innovation. As PJ O’Rourke said: “The free market is just a measurement. It’s a device that helps us understand what people are willing to pay for any given thing, at any given moment. The free market is a bathroom scale – you may hate what you see when you stand on the scale, but you can’t pass a law making yourself weigh less, and socialists think you can.”.
A case in point can be found in the recent challenges faced by Woodside, an Australian energy company. Meg O’Neill, Woodside’s CEO, found herself besieged by protesters objecting to the company’s fossil fuel projects. The company is striving to meet its emission targets while also addressing the practical energy needs of today. Critics argue that the company isn’t doing enough, but in the face of global energy shocks, Woodside has to tread a careful path. It’s a delicate balance that many companies, not just those in the energy sector, grapple with daily.
Let’s remember that capitalism is, at its core, a system of innovation and growth. Woodside’s pursuit of fossil fuel projects is a reflection of market demand, legacy preferences and investments, not corporate greed. The company has pledged to significantly increase its investment in low-carbon energy initiatives by 2030. This is capitalism working as it should: a business responding to market demands while preparing for the future.
The pursuit of profits and shareholder returns should not be viewed as a fleeting objective; rather, it should be seen as a strategic endeavour aimed at establishing enduring profitability and long-term benefits for shareholders. This endeavour requires a comprehensive approach that maximises all available resources, ranging from inputs and human resources to natural resources. Any shortcuts or unethical practices may provide temporary gains but ultimately hinder businesses from achieving sustained profits and overall success. Therefore, the true definition of “sustainable” lies in the ability to generate consistent revenues and profits over an extended period by doing lots of things well: happy customers, happy suppliers, happy employees and happy stakeholders.
Innovation is crucial for consistent and growing shareholder returns in competitive markets. By constantly pushing the boundaries of what is possible, innovation helps businesses enhance productivity, streamline processes, and create more effective and efficient products and services. Additionally, innovation leads to improvements in intellectual property, allowing companies to protect their unique creations and gain a competitive advantage. In the longer term, this intellectual property improves the knowledge base of humanity. Moreover, by finding novel ways to reduce costs, innovation helps businesses maximise their profitability, ultimately contributing to the growth of shareholder returns. Ultimately, the positive impact of innovation extends beyond corporate profits, benefiting mankind by improving the quality of life, advancing technology, and driving overall economic growth. As Joseph Schumpeter most adroitly observed: “The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within reach of factory girls in return for steadily decreasing amounts of effort”.
Don’t feed the crocodiles
However, such a nuanced conversation is lost in the face of radical anti-capitalist protesters, whose actions may attract media attention but contribute little to the dialogue. These people are not smart, but they are ravenous, and while we have a media that relies upon clickbait to monetise their platforms, they gain much more attention than they should. Further, they will not stop until their Marxist goal is attained; the end of capitalism and freedom. They don’t deserve a seat at the table but, astonishingly, are handed power by complicit corporate communications specialists and risk-averse directors who are far more intent on retaining their roles for the short term, versus holding firm for the long term. One cannot negotiate with the crocodile that’s about to devour you. Companies should not appease these radicals; instead, they should stand firm in defence of their businesses, capitalism, and freedom.
Capitalism shouldn’t be defended out of ideological fervour but because it is the best system to facilitate innovation, progress, and freedom. Is it perfect? Of course not. But rather than actively trying to remake it, we should strive to understand it better.
It doesn’t help when the Australian Treasurer wades in…
Australian Treasurer, Jim Chalmers, has taken it upon himself to “fix” capitalism, seemingly by dismantling the very foundations of our market-based economic model (as established by his predecessors Hawke, Keating, Howard and Costello) and replacing them with a framework that reads like a Marxist undergraduate Arts essay.
The Treasurer has proposed a new vision of “values-based capitalism”, criticising the free market economic model. He spoke of co-investing with businesses, of a need for “more markets, not less”, but ones that were “carefully constructed” – which sounds suspiciously like more government control over the economy.
Indeed, when one scratches beneath the surface of Chalmers’ new economic model, one finds a cast of characters eager to get their hands on the “co-investment” spoils. Their quest is not for innovation or growth, or efficiency but for a share of the public funds earmarked for collaborative projects. The end result? A breed of crony capitalism disguised under the euphemistic banner of “values-based capitalism“.
It seems the Treasurer is less interested in naturally occurring market mechanisms that foster competition, innovation, and efficiency, and more invested in constructing a playground where select interests can frolic freely, unencumbered by the discipline of the market. One can’t help but be reminded of Milton Friedman’s quip: “What most people really object to when they object to a free market is that it is so hard for them to shape it to their own will.”.
The brilliant American economist, Thomas Sowell, once remarked, “The first lesson of economics is scarcity: there is never enough of anything to satisfy all those who want it.” In Chalmers’ world, this cardinal rule seems to have been conveniently forgotten. Instead, he presents an economic model that resembles a grand buffet, where only those fortunate enough to be invited can gorge themselves to their heart’s content. Inclusive? Only if you hire a top lobbying firm.
In the memorable words of Ronald Reagan, “Freedom is never more than one generation away from extinction.” The same could be said of capitalism. It requires our defence and our understanding. Not just to defend it against the Marxists, rent-seekers and policymakers who might shape it to befit their personal goals, but for all of us whose lives have been, and will continue to be, improved and empowered by it.
UPDATE 21st August 2023: A great article about “Why We Need to Move on From Profit Outrage“