Is capitalism facing a "crisis of legitimacy"? Could Valueism represent the next evolution of capitalism?

Last week Theresa May gave a speech at the Bank of England. She referred to it being the 10th anniversary of the financial crisis. She also recognised, “The British people, who played no part in causing the financial crisis, have had to make sacrifices in order to return the economy to health and ease the burden of debt on future generations”. And acknowledged that, “The impact those sacrifices have had on ordinary working people has led some to lose faith in free market capitalism”. “And globalisation, which has brought us a great many benefits, has also brought changes which have contributed to a wider sense that our economy is not working as it should for everyone in our society”.

May also said, “These are understandable responses. There are genuine problems with our economy which need to be addressed”. But she cautioned that in addressing them “We should never forget the immense value and potential of an open, innovative, free market economy which operates with the right rules and regulations”. She then went on to extol the virtues of the free market saying, “A free market economy, operating under the right rules and regulations, is the greatest agent of collective human progress ever created” describing it as “the new combination which led societies out of darkness and stagnation and into the light of the modern age”.

May recognised, “For too long, too many communities across the United Kingdom have not seen the benefits of economic growth and prosperity”, and spoke of the “imbalances which are now apparent”. She then went on to outline the actions the government is taking in several policy areas to tackle the concerns people have with the current system.

On the free market economy, she made the personal comment, “My argument has always been that if you want to preserve and improve a system which has delivered unparalleled benefits, you have to take seriously its faults and do all you can to address them. Not to do so would put everything we have achieved together as a country at risk”.

Political commentators noted that her speech in defence of the free market economy is recognition capitalism is facing a crisis. They also suggested the Conservative party had thought they had won their battle with socialism in the 1980’s. And said it is hard not to conclude that this was a defensive move since it was presented the day after Jeremy Corbyn’s speech to the Labour Party conference.

In his speech, Corbyn focused on the consequences of austerity imposed by the Conservative government: the longest fall in people’s pay since record began, homelessness doubled, NHS waiting lists lengthening, school class sizes growing and teachers leaving, over 4 million children now in poverty, more people in work and in poverty than ever before - and the list went on.

Commenting on the fact we are now ten years on from the global financial crash he said, “Tories still believe in the same dogmatic mantra – deregulate, privatise, cut taxes for the wealthy, weaken rights at work, delivering profits for a few, and debt for the many. Nothing has changed. It’s as if we’re stuck in a political and economic time-warp”. And he added, “Our financial system still looks a lot like the pre-crisis one and the capitalist system still faces a “crisis of legitimacy”, stemming from the crash”.

In Corbyn’s view, “Now is the time that government took a more active role in restructuring our economy. Now is the time that corporate boardrooms were held accountable for their actions, And, now is the time that we developed a new model of economic management to replace the failed dogmas of neo-liberalism … That is why Labour is looking not just to repair the damage done by austerity but to transform our economy with a new and dynamic role for the public sector particularly where the private sector has evidently failed”.

Corbyn said, “The Tory approach to the economy isn’t entrepreneurial It’s extractive. They’re not focused on long-term investment and wealth creation. When you look at what they do rather than what they say it’s all about driving down wages, services and standards … to make as much money as quickly as possible with the government not as the servant of the people but of global corporations. And their disregard for rampant inequality the hollowing out of our public services, the disdain for the powerless and the poor have made our society more brutal and less caring”.

Initially, I made a short comment these two speeches saying, “Today the UK Prime Minister Theresa May was forced to defend the Free Market following a speech yesterday by Labour party leader Jeremy Corbyn who attacked Neo-Liberalism calling it a "failed economic model" and a "discredited" system”. I suggested, “We need to avoid such polarised views” Adding that, “First, we need to accept there never has been a free market, and there never will be. And we must also accept some industries can never operate effectively under market conditions. Equally, we must also accept the public sector have a poor track record in the efficient provision of services”. Then I suggested, “There is a solution to the problem. It is effective accountability. Not accountability for costs, but accountability for value creation. There are two parts to the equation - the numerator (value created) and the denominator (costs). The challenge is to define "value", and it should not only be measured in monetary terms if we are to increase real rather than just economic prosperity. When this is achieved, we will be able to determine where market forces are a good solution, and where they are not”. And, “The decisions need to be evidence-based, not ideologically determined”.

To add to my initial comments let me also say, it must be obvious to everyone that the crisis that capitalism is facing is a global problem, not a UK problem. And it is losing its legitimacy even in America, and even among those that traditionally hold conservative views, such as the Republicans in the US and the Conservatives in the UK. This is giving rise to populism on the right and left of politics, and the decline of what is usually called the “centre-ground”. Or so it would seem.

In 2016 A Harvard Political Review article asked is "Capitalism Is Losing Its Cool?” The article cited the spring 2016 Harvard Public Opinion Project poll which found, “capitalism does not appear to be a dominant economic system in the minds of Millennials”. It found that “A majority of Millennials do not support capitalism”. That said, they do not support socialism either. The conclusion the authors draw is that it seems they longer support a pure form of capitalism and, “It is likely that most respondents instead feel like they lie somewhere “in the middle” of the two, splitting their loyalties between the perceived merits and ills of both”.

This conclusion seems at odds with the demise of centrist politics. But the problem may be with politics and political parties, rather than with policies, especially economic policies. And the Harvard research begs the question - how different are the views of the Millennials to those of older generations? Very recent research by the Legatum Institute in the UK sheds light on these issues in a report on economic attitudes in Britain.

The report was written by a self-confessed “strong supporter of free enterprise” “with an agenda” and a belief, “free enterprise policies are a key driver of prosperity”. He nevertheless concludes: “It appears that a large proportion of British voters do not share this view”. It explores public attitudes towards political ‘isms’ (including capitalism, conservatism and socialism); public vs private ownership; free markets vs state regulation; businesses and profit; and social issues and crime.

About the report's findings, the authors say “We find that on almost every issue, the public tends to favour non-free market ideals rather than those of the free market. Instead of an unregulated economy, the public favours regulation. Instead of companies striving for profit above all else, they want businesses to make less profit and be more socially responsible. Instead of privatised water, electricity, gas and railway sectors, they want public ownership. They favour CEO wage caps, workers at senior executive and board level and for government to reign in big business. They want zero-hours contracts to be abolished”. They also find, “The capitalism ‘brand’ is in crisis. It is seen as greedy, selfish and corrupt. The public’s instinctive associations with capitalism compare unfavourably to the public’s associations with liberalism, socialism and patriotism. Indeed, many of those negative associations with capitalism recur, albeit to a lesser extent, in the public’s associations with conservatism". And they add, "In our poll, the notion that we live in a time of ‘responsible’ capitalism finds little credence among the public”.

They conclude, “The public’s top associations with capitalism resemble the kind of ‘brand personality’ one would expect from an organisation in acute reputational crisis. “It is not only young people who view capitalism this way. In fact, those aged 35 and older are more—not less—likely to label capitalism ‘greedy’ and ‘corrupt’. They add, “What is perhaps most interesting—and politically relevant—is that these top associations do not change between Labour and Conservative voters at the 2017 General Election. While Conservative voters are more positive about capitalism than Labour voters they still associate it with greed, selfishness and corruption more than anything else”.

In other findings, “Fewer people associate the word ‘dangerous’ with socialism than with capitalism”, and capitalism takes as much flak as communism. “The proportion of the public who most associate communism with the word ‘corrupt’ is only 4% higher than the proportion who say the same of capitalism”. In policy terms they found, “For key utilities, public support for nationalisation is overwhelming” having, “broad appeal across age groups and even among Conservative voters”.

To examine the public’s support for free market ideas the researchers put a series of opposing statements against each other: in each case, one statement leant towards state regulation while the other leant towards free markets. For each diametrically opposing pair of statements, respondents were asked to indicate where their own views lay on the scale. They found, “When faced with a broad free market idea on the one hand and its non-free market opposite on the other, public opinion tends to favour the non-free market ideal”. Again, they found, “no great difference overall between the views of younger and older members of the public”. And, “Even those who voted for the Conservative Party in 2017 tend to favour certain non-free market ideas. They consider regulation necessary, want increased NHS funding through higher taxes and are ambivalent about whether it is preferential to pay higher taxes and have bigger government or pay lower taxes and have smaller government”.

On the topic of “business and profits” the research finds, “the public’s confidence in businesses and markets to deliver the most beneficial outcomes for the country without intervention is severely diminished”, and none of the indicators indicates the public favour a free market stance. “Interestingly, even Conservative voters tend towards the interventionist end of the scale on some business issues”. “Conservative voters overwhelmingly favour senior executive pay caps. They also think that profit should not come above other considerations and that the government should regulate more, not less”.

The report concludes, “In the wake of the EU referendum debate, much focus has been given to the social attitudes of voters. Now, the political class will need to turn its attention to economic attitudes or face the risk of the ground shifting beneath its feet. And for those who believe that competition, entrepreneurship and free trade are key drivers to make societies more prosperous, it’s time for us to up our game”.

The Legatum Institute report seems to support a conference speech claim made by Jeremy Corbyn. that the "centre grounds" has shifted to the left. But, more importantly, I think it indicates those of us who support capitalism must now recognise that capitalism must again evolve to a better form. We must recognise a new form is urgently needed. That will be easy for those of us who never embraced the current form of neo-liberal capitalism. It will be harder for those who cling to that discredited ideology.

In the context of the Legatum Institute report, I stand by all I said in my initial comment on the speeches of by Theresa May and Jeremy Corbyn. But I reiterate my point that the problems Capitalism faces are not British, but global.

In all of the debates there is a failure to recognise that the problem is not capitalism, but the current form of capitalism. It has been given many names, but Neo-Liberalism is perhaps the most widely used name for it. And it describes its origins in Neo-Liberal economic thinking from the likes of Friedrich Hayek and Milton Friedman. Their ideas being religiously supported by Margaret Thatcher and Ronald Reagan as the evangelists who pushed through market liberalisation reforms and privatisation of government-run assets to try and free the markets. Approaches that were continued by some of the policies of Bill Clinton and Tony Blair. Their thinking also became the dominant ideology taught in economics, finance and management faculties in business schools.

Still the dominant form of capitalism today, it only emerged in the 1970’s, so is quite new. It is directly linked to policies that led to the global financial crisis, and to practices that have created other ills - most being linked to short-termism. It included discredited ideas like Maximising Share Holder Value (since described as “probably the dumbest idea in the world” by Jack Welch), and Stock-Based Compensation which amplified the problem it was supposed to have addressed.

When I say capitalism must evolve to a better form to regain its legitimacy, I also propose that the next evolution learns from the better forms of the past. Earlier forms produced many years of growth in productivity, increase average wages, rising living standards and more prosperous societies. Whereas the recent form has been failing on these measures for more than a decade now.

Whilst it may be useful to look to earlier forms of capitalism for solutions to the current crisis, I suggest it is even more important to distinguish between types of capitalists. Throughout eras past and present we can identify businesses managed for the long-term, driven by strong values, focused on creating shared value, fulfilling their responsibilities as “good citizens of society”, creating very strong businesses. They operated out of “enlightened self-interest”, built social capital (Model Villages) and had loyal employees. The Quakers Industrialists are perhaps the best well known, but there are examples of business owners that operated in a similar way in almost every country of the world. Many of them survive and always retained their own ways, some drifted from them and paid the price (Barclays is a good example). And we see more recently established firms taking the same approach.

My belief is this, the main difference between a good and bad model of capitalism lies in the difference between a focus value creation or a focus on profits. And I do not mean only monetary value when I talk of value creation. Good forms of capitalism are focused on the creation of value for all stakeholders. They recognise that profits are a by-product, and they manage for the long-term. Bad forms of capitalism focus on making profits as their goal. In the long-run, it ought not to make a difference, but those focused on profits tend to manage businesses in ways that destroy value. Despite the rhetoric, employees are regarded as costs; suppliers are managed and squeezed on price rather than seen as partners, and customers are even duped by marketing and advertising ploys. Extracting value from the "value chain", in competition with other stakeholders, becomes the norm. This is in contrast to the focus on creating value.

Recently I coined the term Valueism to describe business and capitalism focused on value creation. It has its roots in the practices of the good capitalists of the past and can be easily understood by reading the Johnson & Johnson Credo. It described its responsibility as being to its direct and end customers (” the doctors, nurses and patients”), to employees, to communities (as “good citizens”), and, “our final responsibility is to our stockholders” who should “realise a fair return". The credo says this is achieved by making a “sound profit” that allows the firm to “experiment with new ideas”, develop “innovative programs” and pay for its mistakes. It also recognises the need to be able to invest in new equipment, new facilities and new products launched, and to keep reserves for adverse times.

This describes what some today call “Stakeholder Capitalism”, but was documented as Johnson and Johnson’s approach in the 1930s, first in pamphlets and later in the credo. It describes a responsible long-term approach, driven by enlightened self-interest. Most interestingly, it does not promise stockholders (shareholders) a maximum return. So, are they a strong business and have they served their stakeholders well, including shareholders?

Sure Dividend provides an annual list of Dividend Aristocrats, a select group of 51 S&P 500 stocks with 25+ years of consecutive dividend increases. They have a long history of outperforming the market. And they are strong businesses because “A company cannot pay rising dividends for 25+ years without having a strong and durable competitive advantage”. Within the Digital Aristocrats, there is an even more elite group, the 22 Dividend Kings. They have achieved at least 50 years of consecutive dividend increases. By 2016 Johnson and Johnson have managed 55 consecutive years. And they are “one of only two companies to hold the coveted AAA credit rating from S&P, with the other being Microsoft”.

Would Johnson and Johnson have achieved these results if their focus has been maximising shareholder value instead of the creation of value for stakeholders? The answer is almost certainly no. I can say that because the average lifespan of a business has been in decline for many years. And the churn rate of companies in the S&P 500 has also intensified.

Johnson and Johnson’s approach illustrates some of the core principles of Valueism and there are several other examples. It drives different relationships with stakeholders, requires different governance and leadership approaches, involves very different approaches to the allocation of resources and management of operations. But more than anything, it is a very different mindset, driven by a very different set of values, that creates a very different kind of business culture.

Valueism might be regarded as a management philosophy. As a philosophy, I believe it represents “a positive direction for Capitalism”, and could represent “the next evolution of capitalism”.

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I am available to speak on the topic of Valueism. [email protected]

I will be speaking about Valueism at a conference on Strategy, Innovation and Growth in Hanoi, Vietnam on the 8th October: https://sage.edu.vn/chienluocdoimoitangtruong/

And we will be hosting a major 2-Day international conference called the Facets of Valueism in London on 23/24th April 2018. This and details of other activities can be found in our recent newsletter: https://www.dhirubhai.net/pulse/smf-newsletter-sept-2017-paul-barnett/