New roadmap for human enterprise

In this newsletter series, I have talked often about the importance of human evolution and higher self awareness to build a better life for ourselves, as well as contribute to a better society and planet. This week, I would like to dwell on its implications for the world we live in, and the unique challenges it presents.

The rise and rise of capitalism, as we have seen post-World War 2, and particularly post the demise of the former Soviet Union, has brought unprecedented prosperity for a lot of us, and instilled a deep appreciation in us for ‘free markets’. Be it in terms of incomes, material possessions, facilities available to us as well as opportunities, we have a lot to marvel and be thankful for. ?

The entire worth of the capitalistic system lies in the freedom it offers to every individual to achieve his or her potential, based on skills, capabilities and hard work. At the basic level, two individuals or entities enter a voluntary transaction where each one has a self-interest. But neither can achieve his/her self-interest without providing something of value to the other. This rational self interest is the very basis of economic prosperity, in capitalist literature.

Adam Smith, the 18th century philosopher and father of modern economics, said:

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

I personally have been a great fan of the capitalist system, which allows people and private organisations to be owners of property (tangible or intangible assets). Competition, which allows firms to freely enter and exit markets, is in theory good for customers as they will get the best value possible from products and services. Prices are determined by a market mechanism, be it for products, services or for human resources in the labour market.

Customers, investors and employees have freedom of choice to opt for better products, seek out the best ventures and pursue better employment opportunities respectively. The government has a limited but important role, to ensure that the system works in an orderly manner. But otherwise, it is a vast market of uncoordinated individuals seeking their own self-interests, which ultimately is supposed to benefit society according to Adam Smith’s theory of the invisible hand.

“People are the creators of prosperity. Without human ingenuity and innovation, we would still be living in caves and have a life expectancy of 25 years. More people - in an environment of freedom and free markets - means more prosperity.” Steve Forbes

Even when Adam Smith propounded his theory, critics pointed out the critical errors in this assumption that a mass movement in rational self interest is going to create a social optimum. Over time, money and power is bound to get concentrated in a few hands, leading to gross inequality and exploitation, they argued. One may contest this assumption by saying that everyone in general is better off, and we should not expect capitalism to be perfect.

But one look at inequality statistics makes you question the system more seriously than just a mere shrug of shoulders. According to IMF data, the poorest half of the world population owns just €2,900 (in purchasing power parity) per adult, while the top 10% holds 190 times that value. Similarly, the top 10% hold 52% of all income, while the poorest half get just 8.5%. This kind of inequality, which just doesn’t seem to get better, shows that we need to reassess how far we have come when it comes to a whole-hearted pursuit of profits, growth and GDP.

Does every individual indeed have the complete freedom to achieve his/her potential when resources and power are concentrated in a few hands? A chasm that is even worse than income inequality, and coming towards us at an overwhelming pace is the digital divide. The rise of a number of digital monopolies or Big Tech companies is a cause of concern for the future, just like Big Pharma or Big Oil or the ‘Too Big to Fail’ Banks that caused the global financial crisis of 2008. While we have vibrant startup ecosystems across the world today on one end, it is also an open secret how companies have become larger than governments in stature and power, and emerged the drivers of global business and economy.

How good is greed?

At the top of the industry ladder, corporate leaders do not necessarily become conscious of their larger role in the society. It is often stated that a capitalist society promotes greed. But I would actually add a note of caution here. When a business owner seeks to maximise profits for himself or the shareholders, he is actually working in accordance with market forces. This pursuit of profit at all costs is what enables businesses to survive and thrive in a capitalist system. If you don't do so, competitors will swiftly come and take over. But the question really comes down to whether this “profit-at-all-costs” approach is good for the society at large.

The McDonald’s joke I share below (may have come to your Whatsapps too, at some point) puts a very subjective take on the topic of self-interest from a consumer’s perspective. Marketing theory dictates that companies exist to create value for their customers, Fast food chains have spent billions convincing us to binge on their tantalising menus of burgers, French fries, shakes, pizzas and what not. And generations have obliged, despite the common knowledge that it is ‘junk food’. The value on offer here is a momentary pleasure for your taste buds.

Yes, we have the 'once in a while' logic, but fast food has been scientifically proven to stimulate the brain’s reward system and release dopamine in a manner that healthy food cannot replicate. Therefore for a lot of susceptible people, it can lead to fast food addiction, which is biologically similar to drug addiction. In this very transaction, you see the concept of rational self interest, as premised in capitalism, go haywire.

But as the dark humour in the joke above suggests, the economy benefits as a whole when people binge on junk food, and later splurge on fast slimming programmes, crash diets, medical insurance, and worse – on medicines, medical insurance and hospitals. The economy would be better off in growth numbers, but with higher rates of disease and deaths. Would you label that as prosperity or decline?

Blind pursuit of profit has been behind the obsession of industrial capitalists with fossil fuels, and the resultant spectre of global warming through greenhouse gas emissions that confronts us today. The Intergovernmental Panel on Climate Change’s (IPCC) fifth assessment report concludes that human emissions and activities have caused 100% of the observed increase in temperature since 1950. The 2010s have been the hottest decade, and also the decade when carbon dioxide emissions grew faster than previous decades, indicating a strong correlation.

And fossil fuels is just one example of how an irrational pursuit of profits may leave all of us poorer in the long run. Think of the trust you have when it comes to private companies providing essential services like healthcare and education. Has that trust got stronger over the years, or weakened?

From rational to enlightened self interest

At this juncture, organisations and their leaders need to understand the limitations of a profit at all costs approach in business. From ‘rational self-interest’, it is time for leaders to embrace the philosophy of ‘enlightened self interest’, where an organization grows as an integral part of the society in which it operates. In the words of noted management consultant Peter Drucker:

“Business enterprises … are organs of society. They do not exist for their own sake, but to fulfill a specific social purpose and to satisfy a specific need of a society, a community, or individuals.”

It has been wrongly construed that sustainability and growth are two contrarian objectives for a business. A lot of companies have been led to believe that doing good for the society, or having Corporate Social Responsibility is largely about good PR and corporate brand building. This vision is inherently shortsighted and self-defeating.

A company should view its existence and relevance from the point of view of every stakeholder, and not just the shareholders. It would mean employees, suppliers, customers, governments and society at large as well. If a company exploits ground water resources that leads to shortages in surrounding villages or dumps its affluents into a river, it is not a sustainable company, though it may be hugely profitable. The same is true for a company that uses sub-standard ingredients to keep the prices of its food products low, or a private educational institution that hires teaching staff with lower qualifications to maximise profits.

Similarly, a business that wants to grow sustainably needs to take greater care of the growth needs and well being of its employees. The US has witnessed an unprecedented surge of people leaving their jobs. From September 2021 to March 2022, this was pegged at around 21 million by the Bureau of Labour Statistics. “Low pay, a lack of opportunities for advancement and feeling disrespected at work were the top reasons why Americans quit their jobs last year,” according to a report by the Pew Charitable Trusts. Such statistics in the ‘birthplace of capitalism’ are clearly cause for concern and introspection around the world. ?

And when it comes to the looming problem of climate change, it is not just about the systemic flaws, but also about the choices we make. The Global Sustainability Study 2021 by global strategy and pricing consultancy Simon-Kucher & Partners?covered over 10,000 people across 17 countries. It shows that sustainability is becoming increasingly important in consumers’ purchasing decisions, as they realise their role as primary catalysts for change. Around 85 percent of people indicate that they have shifted their purchase behavior towards being more sustainable in the past five years, a fact that is particularly true for millennials. Similarly governments are also waking up to make businesses accountable for their carbon footprints, which will compel them to change their business models in the future.

Just like consumers, investors also need to value businesses for efforts towards sustainability for their long term impact, even at the expense of short term gain. The capitalistic system has its merits, but as we are now observing in hindsight, our flawed conception of self interest has brought it to a tipping point where it needs a major upgrade towards Sustainable Capitalism. The corporate ecosystem, need to change, and so does the approach of business leaders. Next week, I will talk about the kind of business leadership that we require in this 'brave new world'.