Trend of ‘conscious capitalism’ is emerging

Alok Ray | Updated on February 28, 2020

In a bid to reform the capitalist system businesses are looking beyond profits to become socially, environmentally sustainable

Historically, capitalism’s biggest virtue lies in fostering economic growth and innovation at rates much faster than under any other alternative economic system (feudalism, socialism, etc). At the same time, inequality in income and wealth has been increasing at an alarming rate in the recent decades in almost all capitalist countries ( with China professing ‘market socialism’). This tendency has created a popular sentiment that the capitalist economic system is inherently flawed, and an alternative is needed. The other opinion is that the capitalist system can and should be reformed without sacrificing its positives. However, opinions differ on the components of a feasible reform agenda.

The dominant opinion among industrialists has moved away from the dictum of Milton Friedman that “the business of business is business”, meaning that the capitalist firm’s sole focus should be on maximising private profits. The belief was, through the single-minded pursuit of profits and shareholder’s wealth, social benefits would somehow be maximised. Even textbook microeconomic theory notes several instances where this is not the case — in particular when there are departures from perfect competition and ‘externalities’ that create a divergence between private and social benefits and costs (eg pollution with negative externalities and labour training or research activities with positive externalities).

But, moving away from these theoretical exceptions, many have now come to recognise that the case for reforming the capitalist system is far more prevalent and compelling.

Different concepts

The reform agenda covers a wide spectrum. The earliest idea was of corporate social responsibility which asks firms, usually by government decree with penalties for non-compliance, to use a stipulated percentage of profits or revenue for designated social purposes. This is already in operation in many countries, including India.

Next came the ‘triple balance sheet’ in the early 1980s. It exhorted business firms to calculate their contribution to profits, along with contributions to society and environment. Firms subscribing to this idea routinely present a performance account of their contributions under three separate heads in annual reports. Though there is no legal requirement as yet, many big firms still do this to project a superior image of being socially conscious, which presumably helps revenue and profits.

The term ‘creative capitalism’ was introduced by Bill Gates in 2008 to suggest that businesses need to focus on expanding markets for products by making them accessible to people at the bottom of the income ladder. In this endeavour, companies should work with NGOs and governments. Instead of profit maximisation, the focus is on ‘impact maximisation’. This would be achieved by differential pricing of products like computer software and medicines.

The concept of ‘shared-value capitalism’ made its entry in 2011, partly in response to widespread discontent over the fast-deteriorating income and wealth distribution in the West. Here, firms are asked to broaden their concept of value creation to incorporate value for society (especially local community). More specifically, this idea emphasises that focussing on products which would be more socially useful, make the production value chain more efficient and (environmentally) sustainable and foster cluster development attracting more investment, production and jobs to the local area.

Benefit corporations or ‘B-corporations’ is another trend coming up in US. These (mostly small- and medium-sized) companies are incorporated as such and are legally accountable to meet expressed social and environmental standards. They receive discounts on transactions with other B-corporations, mutually reinforcing profitability.

Stakeholders’ interests

The latest concept is of ‘conscious capitalism’. The proponents of this idea must pay attention to the concerns of all the stakeholders, particularly workers (improving wages, benefits, job security and working conditions), supplying firms (having a stable and respectful relationship with them) and consumers (passing on part of cost savings through lower prices, avoiding false advertising and sub-standard products), in addition to addressing environmental concerns through appropriate products, inputs and technology. They believe that as firms become ‘conscious capitalists’, better reputation and longer-term performance would enable them to out-compete rivals.

None of these ideas negates the value of profits. Without profits, a firm cannot grow, invest in innovation and bring quality improvements. However, these ideas are asking firms to look beyond private profits, which may also help them earn more in the longer run, by making their business more sustainable, both socially and environmentally. These new ideas — through greater awareness and social and media pressure — would hopefully gain more traction and eventually save capitalism from the (traditional) capitalists.

The writer is a former Professor of Economics, IIM-Calcutta

Published on February 28, 2020

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