The Problem with ‘Stakeholder Capitalism’

Writing in the Investment Monitor on March 18, 2021, Klaus Schwab, the founder of the World Economic Forum, was urging the replacement of the present economic system. According to Schwab, the present system is deficient, since it only benefits a small minority of the population while leaving all the others at a visible disadvantage.

Schwab is of the view that a system that strives at attaining maximum profits, which he labels as shareholder capitalism, is bad news for the well-being of most individuals. He is also of the view that a system where the government runs the show together with the private sector, labeled state capitalism, is also deficient.

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Klaus Schwab recommends another system, which he labels stakeholder capitalism. This system according to Schwab will make sure that justice and equality prevails for all individuals. The urgency of introducing the new system emerged, according to Schwab, on account of the fact that

[t]he sudden and all-encompassing impact of Covid-19 made us understand, much more than the gradual effects of climate change or increasing inequality, that an economic system driven by selfish and short-term interests is not sustainable. It is unbalanced, fragile and increases the chance of societal, environmental and public health disasters. As Covid-19 demonstrates, when disasters strike, they put an unbearable strain on public systems. We can’t continue with an economic system driven by selfish values, such as short-term profit maximisation, the avoidance of tax and regulation or the externalising of environmental harm. Instead, we need a society, economy and international community that is designed to care for all people and the entire planet. Concretely, from a system of ‘shareholder capitalism’, which prevailed in the West in the past 50 years, and a system of ‘state capitalism’, that gained prominence in Asia, and is centred on the primacy of the state, we should move to a system of ‘stakeholder capitalism’. 

Despite Schwab’s misgivings about shareholder and state capitalism, he is of the view that these systems did improve the well-being of individuals. Thus he writes that

we have rarely been as well off as we are today. We live in a time of relative peace and absolute wealth. Compared with previous generations, many of us live long and mostly healthy lives. Our children get to go to school, even often college, and computers, smartphones and other tech devices connect us to the world. Even a generation or two ago, our parents and grandparents could only dream of the lifestyle many of us have today and the luxuries that come with abundant energy, advances in technology and global trade.

Notwithstanding this, Schwab is of the view that

our world and civil society are plagued by maddening inequality and dangerous unsustainability. The Covid-19 public health crisis is just one event that demonstrates that not everyone gets the same chances in life. Those with more money, better connections or more impressive post codes were affected by Covid at far lower rates; they were more likely to be able to work from home, leave densely populated areas and get better medical care if they did get infected. This is a continuation of a pattern that has become all too familiar in many societies. The poor are consistently affected by global crises, while the wealthy can easily weather the storm. Given the downsides of our global economic system, it is clear we must reform it.

According to Schwab,

Given the shortcomings of both of these systems, we believe we need a new, better global system: stakeholder capitalism. In this system, the interests of all stakeholders in the economy and society are taken on board, companies optimise for more than just short-term profits, and governments are the guardians of equality of opportunity, a level-playing field in competition, and a fair contribution of and distribution to all stakeholders with regards to the sustainability and inclusivity of the system….

In both shareholder and state capitalism, the dominance of one stakeholder over the others is the system’s greatest flaw. In shareholder capitalism, shareholders’ aims are often the singular focus; in state capitalism, the government wields too much power. I therefore advocate for a third system, which can be defined as stakeholder capitalism. It is capitalism in the traditional definition of the word: individuals and private companies make up the largest share of the economy. This is, I believe, a requirement for a sustainable economic system: private individuals and companies must be able to innovate and compete freely, as it unleashes the creative energy and work ethic of most people in society.

Moreover, holds Schwab,

The economic activities of such private actors must also be protected and guided, to ensure the overall direction of economic development is beneficial to society, and no actor can freeride on the efforts of others. This is the kind of capitalism we ought to endorse. But stakeholder capitalism does fundamentally differ from the other forms of capitalism we saw, in a way that overcomes much of their shortcomings. First, all those who have a stake in the economy can influence decision-making, and the metrics optimised for in economic activities bake in broader societal interests. Moreover, a system of checks and balances exists, so that no one stakeholder can become or remain overly dominant. Both government and companies, the main players in any capitalist system, thus optimise for a broader objective than profits: the health and wealth of societies overall, as well as that of the planet and that of future generations. It makes stakeholder capitalism the preferred economic system and the one we ought to implement going forward.

The Importance of Striving for as High a Profit Possible

It seems that for Mr. Schwab excessive profit is bad for his agenda to generate a fair society. For him profit is a tool of exploitation. So the economic system that he proposes—stakeholder capitalism—is basically a centrally controlled economy. It did not occur to Mr. Schwab that profit, however, has nothing to do with exploitation—it is about the most efficient use of resources.

Profit as such should be seen as an indicator, as it were, of whether resources are employed in the best possible way as far as promoting people’s lives and well-being is concerned. If the employment of resources results in the expansion of the pool of wealth, this could be seen as indicating that the resources were used in a profitable manner.

Conversely, if there is a decline in the pool of wealth as a result of the particular actions of individuals, then this could be seen as indicative of a loss. These actions caused the squandering of resources.

Obviously, an expansion in the pool of wealth, which is the heart of economic growth and is manifested through profits, should be regarded as the key factor for raising individuals’ living standards. Rather than being condemned, individuals that are instrumental in the expansion of the pool of wealth, which is manifested in profits, should be praised, for it is these individuals that are instrumental in raising the living standards of the population as a whole. If anyone is responsible for the lowering of living standards, it is those individuals that squandered scarce resources, thus weakening the process of wealth and profit formation or in an outright loss.

Profit and loss can be ascertained only in a market economy where the prices of goods and various factors of production can be established. Needless to say, the existence of money is the key in establishing the prices of goods and factors of production. The rates of exchange of various goods and factors are expressed in terms of money; i.e., the amount of money per unit of a good or unit of a factor of production.

Profit emerges once an entrepreneur discovers that the prices of certain factors are undervalued relative to the potential value of the products that these factors, once employed, could pro­duce. By recognizing the discrepancy and acting upon it, an entrepreneur removes the discrepancy; i.e., eliminates the poten­tial for further profit.

According to Murray N. Rothbard, every entrepreneur invests in a process because he expects to make a profit; i.e., because he believes that the market has under­priced and undercapitalized the factors in relation to their future rents.1

For an entre­preneur to make profits, he must engage in planning and antici­pate consumer preferences. Consequently, those entrepreneurs who excel in their forecasting of consumers’ future preferences will make profits. After forming a view regarding the likely future requirements of consumers, businesses allocate resources toward the generation of the infrastructure that permits them to accommodate consumers’ future demands.

Note that it is much easier to accommodate various demands associated with climatic changes or taking care of the “poor” when the pool of wealth is expanding. Hence, the focus should be to allow individuals total freedom to engage in the generation of wealth.

Planning and research, however, can never guarantee that profits will be secured—various unforeseen events can upset entrepreneurial forecasts. Er­rors, which lead to losses in the market economy, are an essential part of the navigational tools which direct the process of allocating resources in line with what consumers’ dictate in an uncertain environment.

Uncertainty is part of the human environment, and it forces individuals to take active roles. Focusing on goals such as the generation of equality and social justice and setting various checks and balances is going to divert resources away from the task of wealth generation. This in turn is likely to set in motion the process of economic impoverishment. Hence, Schwab’s stakeholder capitalism will most likely result in making all the individuals equally poor.

Conclusion

Contrary to Schwab’s assertions, the focus should be on wealth expansion. The greatest expansion can be achieved in a free market environment, by abiding by consumers’ dictate. With more wealth, more ends can be realized. Once, however, the focus is shifted away from profit expansion and toward income equality and a fairer society, economic impoverishment will occur. As a result, we will have more poverty and more misery.

The present economic system, it must be emphasized, is not a free market system, but rather a government- and central bank–controlled framework, which undermines the process of wealth generation. Furthermore, the existence of the central bank and its ability to generate money out of “thin air” causes the early receivers of the newly printed money to benefit at the expense of the late receivers. The ability to generate money out of “thin air” sets in motion the diversion of wealth from wealth generators toward nonproductive activities.

1. Murray N. Rothbard, Man, Economy, and State (Los Angeles: Nash Publishing, 1970), 2:466.

Image by World Economic Forum via Flickr, CC BY-NC-SA 2.0. Article cross-posted from Mises.