Is Capitalism 2.0 a Mirage? (Part 2 of 2)

Yesterday, in Part 1 of 2 of this blogpost, I noted that Capitalism 1.X is under attack for its very legitimacy. One approach to fixing the problem is to change the dogma and the ideology—what I called the approach of Capitalism 2.0. An approach like this is taken in two new writings by major strategic thinkers.

I quoted Umair Haque on his approach to Capitalism 2.0:

The outlines of an updated economic paradigm…include two fundamental axioms:

…first…through the act of exchange, an organization cannot, by action or inaction, allow people, communities, society, the natural world, or future generations to come to economic harm. [italics are Haque’s]

And I quoted Porter/Kramer from Shared Value:

The purpose of the corporation must be redefined as creating shared value, not just profit per se.

These are exciting, heady statements. They are directionally right, and very inspiring to most of us. I believe each work makes a very positive contribution to business thinking.

There’s only one problem. The authors are still using the language of ideology.

Beware of Closed Systems

Haque wants an axiom. Unfortunately for Haque, I don’t know of any organization for whom it is axiomatic that they cannot do any of the things he lists. Calling something “axiomatic” simply doesn’t make it so.

Porter and Kramer, in their treatment of Shared Value, use the word ‘must’ in a similar way (“The purpose of the corporation must be redefined as creating shared value, not just profit per se”). But the result is the same. Nobody ‘must’ do anything, as the human race perversely insists on proving time and again.

Karl Marx, in the Communist Manifesto, declared communism inevitable. Capitalism 1.5 had the same flavor. Haque’s ironic use of “Manifesto” and the language of ‘axioms’ suggest the same pull of logical necessity. But axioms are abstract, not empirical–they don’t drive action, unless someone chooses to act on them. And Porter’s ‘must’ has no causal force; it is exhortation dressed up in the words of logical necessity.

There is a beauty in such simple, powerful idea systems, a beauty well-loved by economists, mathematicians, physicists and strategists. The problem is–they are closed systems. That’s OK for math and physics. But for most other fields, once you get outside a closed system, things eventually degrade.

Inevitability Isn’t

Marx was wrong about communism’s inevitability. Greenspan was wrong about large companies’ inclination to self-regulate based on reputation. Friedman was wrong about the gyroscopic capabilities of the Invisible Hand.

If Porter and Haque believe that they have discovered an ideology as attractive, powerful and self-sustaining as those were, then we’re probably just looking at another shiny-object, perpetual-motion, too-good-to-be-true closed system.

In fact, it was our unquestioned belief in the closed-system aspect of Capitalism 1.X that helped cause Capitalism 1.X to fail. It all sounded so good that we wanted to believe it–until long after the writing was on the wall. Not for the first time, the charm of dogma blinded us to facts on the ground until it became not just overwhelming, but undeniable. We’re left thinking, “What were we thinking?” and the answer is, we weren’t. We were just believing.

The search for another compelling but unrealistic logic is likely to be equally misguided.

Both Porter-Kramer and Haque argue that systemic adoption of Capitalism 2.0 will lead to higher systemic profitability. This is certainly true. But the heart of the matter is not a systemic issue—it is whether individual companies will make decisions that are not profitable to themselves in the short term. And this is where ideology gets in the way:

What should, and will, a company do if an initiative is profitable in Capitalism 2.0 terms–but not profitable in Capitalism 1.X terms? Not every business problem is simply a failure of imagination, even if many–even if most–are. The problem of the commons remains unsolved.

I’m not optimistic that Porter can find a profit that is “imbued with a social purpose…that arises…out of a deeper understanding of competition and economic value creation.” I think that’s a circle that can’t be squared.

But it is also not necessary. The answer lies in sober thinking about how social change happens; not in a new Idea System.

Haque is most productive not when he’s offering ringing phrases, but when he’s offering examples of new business opportunities that are not only holistically profitable, but profitable as well in today’s simple quarterly income statement terms–examples like Threadless and Nike’s Considered Design.

Porter is today more famous for his early Five Forces model than for his value chain model, but the latter has probably had more impact. Similarly, his solid thinking today on clusters and the proper role of regulation may end up having more impact than his heroic effort to cognitively re-conceive competition.

There is richness in both works, worthy of a lot of thoughtful reading.

The Other Solution: Dial Back the Dogma

Ironically, it was Marx who said, “The point is not to understand the world, but to transform it.” Ideologues and dogmatists insist on the primacy of theory. Change agents are more pragmatic.

Parts of our society are addicted to dogma and ideology. Business, under Capitalism 1.X, is one; others are politics, academia and particularly economics. But it’s not the norm.

The legal profession isn’t dogmatic, apart from a general belief in advocacy. Education has many sub-currents but not one unifying theory. The practice of medicine, other than the Hippocratic Oath, is more practical than ideological.

If ideology is ultimately empty calories, then what is to be done? How else can we get to the alternate vision of business that both Porter and Haque so clearly, and rightly, envision?

First, we need to give up our addiction to ideology. What’s needed is not another intellectual home run, but a dogged effort to get better at getting along—on all social dimensions, not just those of business.

What can you do? Here are a few examples:

1. People with visible responsibility can start talking about civic and moral virtues, instead of the virtues of an abstract system which magically does the heavy lifting for us.

2. Porter, Kramer and Haque as writers–and all of us as readers–can use the rich and stimulating examples they have uncovered as a challenge to our imaginations, and a spur to creative thinking. The power of what they’ve written lies more in their examples and simple models than in the attempt at a Unifying Theory.

3. Measurements are powerful in business; many managers believe that management requires it. We can all support global attempts at Integrated Reporting accounting, combining traditional financial accounting with other socially-relevant measures. New vocabularies seriously drive new dialogues.

4. Trade associations can shift emphasis from narrow sectarian lobbying to offering education and perspective on increasing the long-term viability of their industries.

5. Business strategists and economists can look to outside functional arenas; negotiation and bargaining experts know how to integrate zero-sum oppositional positions with shared interests;

6. Politicians can rediscover bi-partisanship and compromise, rather than scorched-earth zero-sum competitive games; citizens can hold them accountable by re-discovering the same.

7. Elections and legislation are heavily controlled by corporate interests in the United States today. This is not long-term healthy even for business. Business organizations can collaborate with other groups to pursue campaign finance reform, thus putting stakeholder collaboration into serious practice.

8. Business education, mainly MBAs, can start emphasizing long-term sustainable collaboration, rather than Capitalism 1.X. Ethics courses are no good if they’re contradicted by 1.X courses in competitive strategy down the hall.

9. News media can try to stay sober, serious, thoughtful and responsible, not giving in to pure entertainment; business can play a role along with consumers in helping media resist the pull in that direction.

There is no unifying ideology; if Santa Claus can’t pull it off, why should we expect strategists and economists to do so?

But there are still guidelines.

  • “Be the change you want in the world.”
  • “The best way to make someone trustworthy is to trust them.”
  • “Ask not what your country can do for you, ask what you can do for your country.”
  • “Don’t argue over who gets the slice of the pie, focus on making the pie bigger.”
  • Maybe even, “Do unto others as you’d have them do unto you.”

When Gerstner took over IBM he said, “The last thing IBM needs is a vision.” The last thing capitalism needs right now is a new ideology. Business needs simply to take its seat among other social and political institutions, and to play nicely in the sandbox alongside them.