Getting Capitalism And Democracy Right - A Mindset and Life View Matter: Smith Had It Right, Friedman's Explicit Teaching, as Applied for 50 Years, Did Not, and President Trump Certainly Does Not!

First, The Tragic Corona Virus Pandemic, and the Trump Failing.

With its global reach and overwhelming harm to people everywhere, does the pandemic tell us anything about this mindset and life view question? Yes, it does.

Using one of Disneyland’s most famous rides as a guide, “It’s A Small World After All,” it reminds all of us that we do share this one planet. This one joyful Disneyland ride reminds us that we do have some extremely important shared interests, some unifying common bonds. So, it suggests pleasantly and clearly that there is a reason for us to have life views and mindsets that reflect things that unite us rather than things that divide us.

The pandemic would have been much better dealt with from the start, in the United States and worldwide, if all nations and international organizations had been working together – grounded in this unifying long term life view and mindset.

The handling of the pandemic, nation by nation, and even state by state in America, has been sadly uncoordinated, with the Trump administration being one tragic example of getting things wrong from the start. The Trump failing is clearly visible through the delayed action and the subsequent (and ongoing) bumbling on specific items – like the irresponsibly delayed testing availability and provision, the inexcusable failure to get  supplies and protection to all health care providers and all essential workers in a timely fashion and lack of national coordination of health care systems and associated needs. 

And, most recently (mid-April), the unthinkably divisive posture he has taken toward the governors of the states on testing and on who decides about when and how to ease restrictions is another irresponsible decision on his part.

In fact this bumbling is not surprising given that the Donald Trump life view is antithetical to a unifying life view and unifying behavior, so his leadership is certainly in question on this ominous matter – and on his entire presidency!

Now, Mindsets, Life Views, Professors Smith and Friedman – The Lessons We Must Learn!

Democracy and Capitalism, when both are done right, enable societies to reach their highest long term value, wealth and full life well-lived potential.

Professor Adam Smith, the father of modern economics by virtually all accounts, wrote in 1776 about the way butchers, brewers and bakers should be able to make and sell their products and how people in the marketplace should buy them – or not. Smith’s teaching 250 years ago supports and even screams out for the life view and long term mindset presented in this narrative – the way to get capitalism right that follows his teaching.

Professor Milton Friedman, a disciple of Smith and a Nobel prize-winning economist from the University of Chicago wrote his doctrine in 1970 for how to get capitalism right. He wrote, in the New York Times Magazine in September, 1970 – and taught through 2005 - that "there is one and only one social responsibility of business–to use it 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." This is his mindset or life view of the purpose of companies in a free market economy.

Friedman’s profit-as-sole-purpose model for leaders of corporations has been dominant in free enterprise capitalist economies ever since. It has been taught in business schools and used as the singularly important performance measure for companies and their top management for the last 50 years. Much value and wealth has been created over this time period. However, it is sub-optimal as a model and some serious leadership mistakes have also flowed from (largely) perverse applications of this model. Yet, it remains dominant.

What Is The Difference And Why Does It Matter?

The difference lies in the mindset or life view choice leaders make.

The short description of the difference between these two critically important mindsets (life views) is:

1.     The Friedman shareholder (profit-as-purpose) mindset is short term, inward-focused and win-lose.

2.     The Smith stakeholder (primary stakeholder groups) mindset is long term, outward-focused and value-optimizing for each of the six (6) primary stakeholder groups of every corporation – every company or organization.

This difference matters because one of the outcomes, if not the uniquely important long term outcome, of every corporation (company, organization for profit or non-profit, publicly or privately held, etc.) is the long term maximization of its own value or wealth creation.

The ironic reality is that the road to maximization of a company’s long term value (wealth creation) goes through its focus on and optimization of the long term value it provides to each of its six (6) primary stakeholder groups!

Professor Friedman would almost certainly have explained this model this way 50 years ago if he had not considered it an automatic result (“the invisible hand”) of each company in an economy focusing narrowly on making profits from its product or service.

Professor Smith articulated it explicitly and  pointedly in his teaching 250 years ago.

So, Getting Capitalism and Democracy Right.

In August, 2019, a group of CEOs from some of America’s leading companies, through their association, the Business Roundtable (BRT), signed a new purpose statement for corporations. The BRT is an association of CEOs from several large American companies. Collectively, their companies have more than 15 million employees and $7 trillion in annual revenues – having businesses in every state in the United States.

BRT effectively endorsed the broad stakeholder mindset and model as the purpose of corporations on August 19, 2019. This decision moved away from (replaced) their long held shareholder purpose – which they had adopted formally in about 1997, and which was passionately presented and urged on capitalist (free market) economies by Professor Friedman in 1970. Again, this model has been dominant for the last 50 years.

A Bit More About The Shareholder-Focused Mindset.

This long held idea that it is by focusing on profit day in and day out that companies will achieve this outcome (long term value maximization for the company itself) is simply wrong!

A correct understanding of Professor Milton Friedman’s teaching, it must be said, is that he argued that when management has a singular focus on profit as it does its work, all those affected by its work, throughout the economy – especially its own employees, communities, suppliers and the general public interest will be best served as though by the guidance of an invisible hand - with all companies behaving in the same way. His motives and expectations for societal well-being were fine.

There is no mystery here. This model in action argues that, with this behavior and action template in use by all participants in a free market, all participants including all people will be best off. He therefore implicitly argued that the effects (outcomes) for what we call the “primary stakeholder groups” of one company and all companies would be as good as they could possibly be. This model, though, had the mindset and life view, the “focus criterion” precisely backwards!

This shareholder and (short term) profit focus that the Friedman doctrine calls for relies on the notion of this “invisible hand” that would automatically guide the company and collective result for societies and economies to this highest wealth and value level over the long term. Again, for the last 50 years this doctrine has been literally dominant in business education curricula and in corporations.

It has indeed resulted in value creation. It has also required the leaders of companies to behave in accordance with this dominant short term mindset, partly but not solely driven  by tying top management compensation to share price or market capitalization, etc. – measures only of shareholder well-being.

That is, one of the flaws of this model is that it asks – even requires – managers to behave in short term, inward or self-focused ways. This flaw alone is disqualifying.

One result has been companies making big value destroying mistakes (Enron, WorldCom, Adelphia, VW, GE, GM, etc.). Another result of this mindset is the 2007-’08 great recession, which is directly attributable to the behavior this mindset induces. The reality is that, as special as Professor Friedman's teaching is, the 'invisible hand" effect is not automatic. The teachings of Adam Smith were more explicit, as we will see, but without being front-of-mind focused, even his teachings have not been fully followed.

A Bit More About The Primary Stakeholder Group-Focused Mindset.

The primary stakeholder group mindset, on the other hand, asserts that a company that focuses on optimizing the value it provides to each of its primary stakeholder groups will produce as one outcome the maximum long term company wealth and value creation – precisely because of this serving, outward focus. That is, the ironic outcome for a company, by focusing on optimization of the value it provides to each of its primary stakeholder groups – each relative to the others - will be long term maximization of the wealth creation (value) of the company itself!

Here is the same idea expressed as a formula:

IVM= f (S₁VO, S₂VO, …S_NVO).

That is, a business (and a person) will maximize its own long-term value when it devotes its time, talent and treasure (its focus) on optimizing the value it provides to each of its primary stakeholder groups.

The Primary Stakeholder Groups of any organization are: a. Customers, b. Employees, c. Financial Investors, d. Suppliers, e. Communities in which it has a presence and f. Society at large (the general public interest). 

Professor Adam Smith, a moral philosopher by education, used his own words to express this mindset several times in his two books. Here are some of his own ways of saying the same thing:

1. “The property which every man has is his own labour; as it is the original foundation of all other property, so it is the most sacred and inviolable…To hinder him from employing this strength and dexterity in what manner he thinks proper without injury to his neighbor is a plain violation of this most sacred property.”
   
   
2. “How selfish soever man may be supposed, there are evidently some principles in his nature which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it."
   
   
3. “Man was made for action, and to promote by the exertion of his faculties such changes in the external circumstances both of himself and others, as may seem most favourable to the happiness of all.”
   
   
4. ‘He is certainly not a good citizen who does not wish to promote, by every means of his power, the welfare of the whole society of his fellow citizens.”

It is as clear as can be that he connected focus on others with focus on self. He gave us an axiom that connects self-interest and other-interest.

Therefore, the way for a company in a free market capitalist economy to maximize its own long term value and wealth creation is to optimize the long term value it provides to each of its primary stakeholder groups.
 It is here, though, that even followers of Adam Smith, including Professor Friedman, did not fully explain the front-of-mind necessity that must exist for the "invisible hand" concept to work. 
And importantly, Professor Smith almost certainly did not (and probably could not) anticipate that the six primary stakeholder group reality would exist in the way we now understand it in the 21st century.
 We do. The BRT new purpose statement does. Some other students of getting capitalism truly right do.
This explicitly front of mind focus is essential now. We stand of course on the shoulders of many, but especially those of Adam Smith and, more recently, Milton Friedman. We, though, now know that companies, leaders and free market economies must be explicitly committed to the broader primary stakeholder group-focused life view and mindset in order for capitalism to be the economic catalyst for society that it can and must be. 
 No new sentence!

What About President Trump And His Mindset, His Presidency’s Performance In The Context of This Discussion of Capitalism and Democracy?

This article until now has been primarily discussing Capitalism (and indirectly Democracy) done right and wrong, and has looked at life views – mindsets – to make the case.

The same concepts, the same criteria for achieving long term societal well-being, apply to sovereign nations – Democracies and all governance forms.

In a nutshell, Donald Trump has brought the short term, inward-focused and win-lose (us against them) mindset to the White House, and he personifies all that is fatally flawed about this mindset. It applies as fully – and more so – to the larger public interest stewardship that government leaders are entrusted with as it does to corporations in a capitalism-done-right free market economy.

With other autocratic leaders around the world, he is failing. He is failing with a flourish. Others are failing in other ways – but all the failures are tied to this short term mindset!

President Donald Trump is the quintessential failure as a “leader” in the private sector and even more robustly he has failed as a “leader” in the public sector!

Why? Because he personifies all the value destruction potential, the sub-optimal potential that the short term mindset brings to the nation and world – in an absolute sense and when compared to the value creation potential the long term, outward-focused and primary stakeholder group-focused mindset –life view – can bring to the nation and world!

His presidency has displayed this failing from day one. Each day of his presidency, helped by the win-lose philosophy and conduct of his close advisers, most of whom are themselves absolutely flawed as public servants, has been a seminar on selfishness. But, it has not been quite so fully on display until the corona virus hit the people of the planet. His mistakes, including unforgivable delays in decision-making and attempts to cover his mistakes up by lying, are unassailable proof of his incapacity to handle the job.

A Final Thought.

The Smith stakeholder (primary stakeholder groups) mindset is presented in the context of free market economies and one model for the way companies can approach their existence.

This mindset, as a more general matter, is a golden rule-connected model for behavior of people, companies, governments – all human groups and interactions.

To be long term, outward-focused and value-optimizing for each group of people we significantly affect over time, as individuals and in our own groups, is to be living our lives based on a servant-based leadership life view. And, happily, it is the catalyst that allows all nations, people and peoples to get on their highest long term value trajectory and stay there. 

It connects Democracy, free market Capitalism and the better angels of human nature in the best way possible!