In the early days, capitalism was based on the idea of working for the benefit of everyone. Not just for the benefit of the owner but also the customer and other stakeholders. It was meant to be a balanced system. Only at the end of the 20th century, it started to skew towards the interest of only one group, the owners and shareholders.

While in the early days, the leaders were willing to sacrifice numbers to save people, they sacrifice people to save the numbers.

When people are subordinate to money, it leads to an organization that lives for the short-term financial benefits of the few.

When money is subordinate to people, it leads to an organization that values its customers, employees, and long-term health over short-term profits.

Boomers Culture

With the end of World War II, the so-called baby boom in America started. More children were born than at any point before. More importantly, unlike their parents, who experienced wars and economic depressions, these children were born into a time of economic development and prosperity. Their parents sacrificed a lot for the children to have better lives than the parents had.

The previous generation was used to serve others. The boomers started to get used to the idea of serving themselves in the first place. Their parents worked hard, and there was enough for everyone, so accumulating wealth became part of life. Because there was enough for everyone and the boomers were raised in prosperity, when they became young adults, they could focus on social issues instead of on pure survival.

In the 1960s, it was still the white male Christians in charge. The movement for equality of women or African Americans just started. However, that wasn’t all. Since the boomers were raised with the idea of taking care of themselves first, they eventually brought it with them when they entered the workforce.

When the baby boomers, who never had to suffer through life, started to replace the older generation in leadership roles, they focused more and more on creating an environment where their needs had to be fulfilled first, before anyone else’s. It even led to more polarized politics when the opposing party members became not only opponents who can be reason with but enemies who should be fought.

Consumerism and focus on the short-term became rampant. In the 1980s and 1990s, everything was about comfort and disposability. Products that lasted decades in the past were now meant to last a season and then be replaced with newer models. And ultimately, as Simon Sinek suggests, this disposability transferred also to people.

Milton Friedman And Capitalism

While for most of the 20th-century, employment was for life, and the managers took massive lay-offs as the last measure, it gradually became part of the standard corporate practice. It is not the measure of the last resort but the tool to be used first to protect the numbers. Sinek suggests that it was President Ronald Reagan who in August 1981 fired 11,000 traffic controllers in a labor dispute and set a new tone, a new approach to solving corporate problems. And others followed.

Mass lay-offs started to be a standard tool in corporate leader’s toolbox in how to fix short-term financial trouble. Instead of protecting people, leaders began to protect numbers. What was the drawback for the corporate leaders? They lost trust. How can the employees trust their managers who care more about financials than about them? They simply can’t. It naturally led to the dissolution of the jobs for life mindset. Toxic cultures full of cynical workers and greedy managers prevailed.

This brings us to the definition of capitalism. Milton Friedman was an American economist who received the 1976 Nobel Memorial Prize in Economic Sciences. He can be seen as a father of the modern economy. In his 1962 book Capitalism and Freedom, he expressed this idea: “There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

And with that, he doomed us all. It is pretty much the definition of modern capitalism. It is all about profits. Nothing else matters. As others jumped on the bandwagon and the business at the end of the 20th and beginning of the 21st century ignores its moral responsibility to the people.

As long as you obey the letter of the law, it doesn’t matter what negative impact you have on people’s lives, being it your employees, suppliers, or customers. Businesses care about the quarterly results and the stock price, essentially serving only one stakeholder, the shareholders, while ignoring the needs of all the others who make the business run.

Economists like to simplify and, in fact, oversimplify life, so it fits their models. So focusing on profits is a nice oversimplification. The thing is, the “rules of the game” Milton talks about the need to be more than just the law. Companies function in a society, so social norms, social responsibility, equal opportunities, and respect for your fellow citizens should be part of the rules. And often, it’s not.

The Importance Of Shareholders

Until Milton Friedman came up with his economic theory, the customer was the business’s primary focus. Only after Friedman, the focus started to change towards shareholders. The business no longer exists to serve the customer but to increase the value for shareholders.

In theory, they build products for customers, create jobs, build wealth, and give returns to owners. Everyone wins. In practice, it is primarily the owners who win. Focus on value for shareholders leads to cost-cutting, mistreating of employees, and low-quality products for customers.

The stock price is more important than the actual health of the business. Just look at the most “valuable” companies today. You will see that many of them don’t even turn a profit, create disposable products that no one needs in sweatshops in countries with low protection of labor. It is all about the stock price, the value for shareholders.

And since management teams are often significant shareholders, they are incentivized to care more about the stock price than the customers and employees. It can easily lead to short-term thinking like laying off employees just to hit the numbers.

The problem with this approach is that shareholders are often driven just by potential gains and may not stick around. They can move their investments freely to another company. Employees are much more sticky. Their whole lives can revolve around the company, and they are often willing to stick with it in bad times. They are much more committed. Therefore they should be cared for.

Imperfect Society

We live in an imperfect society. However, as Simon Sinek suggests in The Infinite Game, things can work even in a flawed society where people are often, or even primarily, concerned only about themselves. This propensity for self-interest manifests in trying to be better than your competitor on the market. So you produce good quality goods that customers buy for a reasonable price. In the end customer benefits from the competition.

That’s how it works when the system is well balanced and it is only a game between the producer and the customer. All this changes when outside investors and analysts step in. Their interests are not compatible with the interests of the other two groups. Investors want a return on their investment and often want it as quickly as possible. So the producer starts cutting costs and cutting corners. Now investors reap the benefits, while the producer’s employees get laid off, and customers get lower quality products.

The problem is that many of the investors don’t invest in the long term. They want a quick win. They may own the shares, but they don’t act like owners. They stepped in to make a quick buck and move on to another investment. This version of capitalism is a far cry from the one that the early proponent and father of capitalism, Adam Smith, imagined in his Wealth of Nations. The company’s primary goal should never be to make money, but to advance something bigger for the benefit of the human race, be it technology, quality of life, knowledge, or health. Money is just a byproduct caused by customers seeing the value in what the company does. And what is the point of accumulating wealth anyway?

What Is Wealth For?

In Flourish, Martin Seligman asks a question. What is wealth for? Is it to increase well-being? Not really. Wealth is primarily for generating more wealth. In the 20th and 21st centuries, there is an apparent disconnect between wealth as measured by GDP or gross domestic product and well-being. Yes, people in wealthier countries are generally healthier, living longer, and having easier lives, but they are not necessarily happier. When you are truly poor, getting more money has an immediate and measurable positive impact on your life satisfaction.

However, as you get richer, each increase in income comes with a lower and lower increase in well-being. It starts to level off, and you see diminishing returns. In fact, for someone making a million dollars a year, an increase of ten thousand for sacrificing a couple of weekends would lead to lowering their life satisfaction.

Seligman points to research he did with Ed Diener when they surveyed people from various economic backgrounds and measured response to a statement “you are satisfied with your life,” on a scale of 1 (complete disagreement) to 7 (complete agreement). The wealthiest Americans would respond with 5.8, the Pennsylvania Amish 5.8, the Greenland Inuit 5.8, African Masai 5.7, international college students 4.9, Calcutta slum dwellers 4.6, California homeless 2.9, Calcutta homeless 2.9.

The wealth of the wealthiest Americans and Greenland Inuit or African Masai is nowhere near each other, yet their life satisfaction is the same.

Putting It All Together

What can you do if you are in charge of a business to get back to the roots of capitalism, where everyone benefits and that is more sustainable? Capitalism with a human face? In Leaders Eat Last, Simon Sinek presents this definition “Leadership is about taking responsibility for lives and not numbers. Managers look after our numbers and our results, and leaders look after us.”

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What is your take on the topic? Do you believe that the recent version of capitalism is broken or do you feel it works just fine? Do you believe that the only reason for company’s existence is to make money or is there a higher reason? Do you subscribe to the idea that the primary goal of the company is to generate profit to its owner, or do you believe that the primary reason is to make sure that all the stakeholders benefit?

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