Capitalism is perhaps the most misunderstood part of American culture. We call ourselves a capitalist nation and believe our democracy thrives because of capitalism, as opposed to the oligarchies, dictatorships, and socialism of our neighbors. Many definitions exist for capitalism, but how many people really understand it? Today, especially following the Great Recession earlier this century, capitalism has become wrongly equated with greed and corruption. However, as someone who has worked on Wall Street and written extensively about it, I know it’s neither of those things.
When I wrote my book, Transforming Wall Street, I argued for a conscious capitalism, one that benefits everyone by seeking profit but in an ethical manner. For the book, I interviewed numerous theorists on capitalism as well as the people who work on Wall Street every day. One of the most fascinating people I talked to was Professor Michael E. Porter from Harvard Business School. He is the world’s leading authority on competition in business. In this article, I’ll share some of the highlights from my interview with him. His definition of capitalism may surprise you.
Professor Porter began our interview by saying that most people in finance will tell you the same old story about how finance is about providing liquidity and mitigating risk, but Professor Porter was quick to state, “It’s not about that. Capitalism is actually about meeting customers’ needs.”
When I asked Professor Porter how meeting customers’ needs relates to conscious capitalism, he gave an example of how recently banks have created products whose success was dependent on the customer’s failure. For example, the bank may not make money on a free checking account, but it will on overdraft charges. Such products and services do not serve the basic purpose of capitalism, which is to serve the customer. Professor Porter argues that we have to change this mindset among capitalists and make them realize that capitalism is “this enormously powerful vehicle for meeting human needs that has massive benefits. The first benefit is that it’s self-sustaining. If we can use capitalism to address poor nutrition, we don’t have to depend on giving or charity. If we can use capitalism to deal with nutrition, we can scale it to hundreds of millions or billions of people. Whereas, if we use the NGO (non-governmental organization) or government model, we’re constantly strapped for resources.”
Professor Porter went on to explain that, historically, capitalism has been the tool that has made the world better. “Some of the bad in the world may have been created by capitalists, but pretty much most of the good in the world had been created by capitalists who provide services and meet the basic needs of people, whether they’re food needs or security needs or housing.”
Unfortunately, today that understanding of capitalism has been largely forgotten and the focus has been solely on making money. However, as Professor Porter notes, “The making money part of it is actually sort of the gate that a capitalist has to go through…. And it’s the ability to make that profit that makes all those people you hire permanent employees, not temporary employees. It makes all the things you buy from suppliers to be things you can keep buying forever. So capitalism is this enormously powerful, almost magical phenomenon where you have nothing and then somebody comes up with a way to meet a need efficiently that you can make a profit at, and all of the sudden, you have vast value—a vast wealth in society plus all those needs are met.”
As an example, Professor Porter referred to how the Hershey Company operated in Hershey, Pennsylvania in the mid-twentieth century. He states that because Hershey was the only corporation in town, the company “just sort of intuitively accepted responsibility for building up the supplier base and improving the health of their workers because it was good for them, and in the old, old days, capitalism. The great capitalist understood this intuitively and did it. But as we got a more modern society with more institutions and more government entities and more non-profits, all of a sudden, businesses kind of slipped away from this.” Professor Porter went on to talk about how globalization has made companies no longer feel a responsibility to American communities.
The truth is that wherever a company is located, its purpose should be to enrich the lives of both its employees and its customers. It can do that by giving back to the communities where it is located and all the communities it affects. As Professor Porter says, capitalism is about meeting customers’ needs.
I call on all CEOs and capitalists to think about how investing in communities would be good for their businesses. We need to return to the capitalist values that built America. Happy employees lead to better customer service which leads to happier customers which leads to profit. When we apply conscious capitalism, it is good for everyone.