Capitalism: flawed but working

Journal of Business Strategy

ISSN: 0275-6668

Article publication date: 1 December 2004



(2004), "Capitalism: flawed but working", Journal of Business Strategy, Vol. 25 No. 6.



Emerald Group Publishing Limited

Copyright © 2004, Emerald Group Publishing Limited

Capitalism: flawed but working

Paul FavaroPaul Favaro is President of Agilis, a firm that advises top management on strategic and organizational issues. Mr Favaro is also an Adjunct Professor of Management & Strategy at the Kellogg School of Management.

The Support Economy: Why Corporations Are Failing Individuals and The Next Episode of Capitalism

Shoshana Zuboff and James MaxminPublished by Viking Books

While reading the introductory chapter to this book I felt like I was reading the script of a speech given over a bullhorn on the streets outside of a World Trade Organization meeting. Railing against the current "managerial capitalist" structure, and the evils of the corporate cabal that oppresses the lowly individual in the humble pursuit of self-actualization, the authors assert that societal changes have laid the foundation for a new episode of capitalism based on a new enterprise logic.

That logic is based on the proposition that all value resides with the end consumer. Therefore, all commercial activity will and should evolve towards advocacy for individuals in a new system of "distributed capitalism," where supporting end consumers becomes more the focus of enterprise than it is today. The principle societal change that has brought this about is the enormous wealth created by the current system – essentially sowing the seeds of its own destruction, much like Marx's 19th century views of the conditions under which capitalism would give way to communism.

The husband-and-wife authors are anything but deconstructive anarchists, however. One is a Harvard Business School professor, the other a former CEO of three major corporations. Their views are thoughtful and well-constructed, not to mention deeply held. They conducted extensive research reaching back to the 1980s, when they started following a group of "visionary top managers" while each "fell prey to corporate politics, self-interested boards, and the whims of financial analysts reacting to short-term fluctuations in a company's earnings."

The authors suggest that the lure of financial engineering is one of the key reasons companies fail individuals and society. This is quite true, but has less to do with the existing managerial capitalist system than lax controls and misaligned incentives put in place by complacent boards. These are characteristics that would condemn any economic system to corrupt opportunism.

In my view, having worked with the top management of many companies over a 20-year consulting career, most CEOs would agree with the need to place more focus on satisfying end consumers. Doing this well seems to be already generally accepted as what makes companies succeed. When BusinessWeek, a respected voice of the managerial capitalists, came out with its most recent profile of the top 50 performing companies in the US, it said that what these companies had most in common with each other was "a deeper understanding than their rivals of what makes their customers tick."

And that's the point. Companies get it and are focused on achieving it. Not for the greater good, but because it is how they will succeed, earn large bonuses, and make the cover of BusinessWeek.

A key premise of the authors' treatise is that corporations today, captive to their 100-year-old managerial capitalist view of the world, are poorly equipped to serve the "new individual" who demands so much more. Actually, corporations have been historically quite capable of adapting their products and services to meet the evolving needs of consumers. The ones that weren't no longer exist, so the ones that survive tend to be pretty good at it. The top vote-getter in Fortune Magazine's 2003 and 2004 Most Admired Corporations Survey was Wal-Mart, a company that is constantly pilloried in the press for its debasing of the American culture and workforce. And yet consumers can't seem to get enough of it. And in my hometown of Chicago, one community is fighting its own politicians to get a Wal-Mart store built. Seems they want the jobs and low priced goods that Wal-Mart is known to deliver.

I should say that this is a wonderful book to read if you want to stretch your thinking to what is possible in our business world. I encourage corporate executives to read it for its inspiring call to serve the individual consumer better.

But, still, I have two major problems with this book. The first is the view that the current capitalist system is fatally flawed. The fact is, wealth creation by corporations (as measured by growth in market capitalization and dividends) in the past 20 years is greater than all the preceding 80 years combined, and investor confidence (as measured by the proportion of individual wealth invested in the stock market) is at an all-time high. Doesn't seem fatally flawed to me.

The second problem is the view that there is a better system out there to be had if we only would reach for it. In 1947, Winston Churchill declared, "Democracy is the worst form of government, except for all the others that have been tried from time to time." Managerial capitalism, like democracy is not perfect (no economic system is), and it is easy to shoot holes in it. Distributed capitalism is an alluring siren for those dissatisfied with the current system. Communism looked pretty good on paper, too. That one didn't turn out so well.

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