Modern American capitalism makes rich corporate titans massively richer but leaves the rest of us behind. The economically irrational but psychologically rational objective of preserving their elitist club is a plausible reason for the choices corporate titans have made. Another possibility is that these powerful titans are missing the fact that the exclusive system they preserve has been extremely costly not just for America but for them personally.
For example, employee disengagement stemming from bad corporate culture costs American businesses an estimated $483 to $605 billion annually. That’s nearly $13 trillion in market capitalization using today’s S&P 21x P/E multiple. A part of that value would go to business executives through stock options and other equity awards, so their failure to improve the treatment of their fellow employees is costing them personal compensation. As another example, race-based exclusion has cost America more than $50 trillion in GDP since 1990 alone. A part of that GDP could have gone to corporate bottom lines, resulting in even greater increases in market capitalization.
Although America’s race problem has stubbornly persisted since our founders embedded discrimination into the country’s founding documents, management’s horribly discouraging treatment of blue- and white-collar workers hasn’t always been this bad. One needs only look at Johnson & Johnson’s original credo written in 1947 to see the seminal corporate commitment to stakeholder capitalism, including fair treatment of employees. Even Mr. Shareholder Primacy himself, Milton Friedman, understood that highly engaged employees enhance shareholder returns. (Why American corporate titans have turned a willful blind eye to these potential profits is the topic of a future article.)
It is time for a new blueprint for American enterprise. Capitalism has shown itself to be a powerful economic system, but it can be even greater. Academics, policymakers, and even many businesspeople (see the Business Roundtable’s redefinition of the Purpose of the Corporation, renouncing shareholder primacy) all agree that our current form of Capitalism has enriched the few at the expense of the many. It has made making ends meet difficult for good, hardworking people. It doesn’t have to be this way. There’s another approach that can make capitalism even greater through business, government, and labor cooperation reminiscent of the post-World War II period. I call it Patriotic Capitalism.
But before we can successfully pursue Patriotic Capitalism, it’s wise to understand how it evolved from Johnson & Johnson’s stakeholder capitalism to our current form that keeps regular people down.
Defining Patriotic Capitalism
In 1971, a memorandum to the U.S. Chamber of Commerce submitted by future Supreme Court Justice Lewis Powell argued that American enterprise was under attack by academics, labor and university students seeking a more humane society and a greater sense of corporate social responsibility even if it meant lower profits. Powell warned businessmen that accepting the idea that corporations owed a duty of care to workers and society was a dangerously slippery slope that could impede the pursuit of profits.
Powell urged business leaders to fight back aggressively: he implored them to pool their considerable resources to finance lobbying and political action for conservative causes, fund think tanks and academic programs to produce content and classes on Chicago School shareholder primacy economics, and take over the media airwaves to control public opinion, among other strategies intended to grab power from regular people and place it in the hands of business leaders and capitalists.
Powell’s blueprint was enormously successful and swung the pendulum of power completely into the hands of business and capital, but the brutal economic violence inflicted by the pendulum’s swing has been costly to most people in America.
Patriotic Capitalism is the antidote. It is now well documented that Chicago School economics has alienated much of the public from capitalism altogether.
Patriotic Capitalism aligns private and public interests to ensure broader access to capital and prosperity. This Patriotic Capitalist system puts the interests of country, democracy and the common good first. It favors investments that prioritize both profit and purpose because they are not mutually exclusive attainments. Patriotic Capitalism recognizes that workers, the managers of the companies who employ them, and the shareholders of that company are all inextricably intertwined in a common fate such that mutual success is beneficial for everyone. The Patriotic Capitalist approach puts the American Dream back within reach of everyday Americans while benefiting those who have seemingly already achieved it. It also burnishes America’s reputation and national security because it increases economic power.
Practicing Patriotic Capitalism
It is not enough to conceptualize a new system of capitalism—you must also practice it. Fortunately, many investors and business leaders are already embracing the practices that define Patriotic Capitalism. Certain categories of investment are ripe for Patriotic Capitalism. For example, increasing the supply of affordable housing can strengthen society by decreasing family economic insecurity and creating new jobs. Increasing access to capital for women and people of color, especially historically disadvantaged Black and Latine people, can unleash hidden talent and increase GDP by an estimated $5 trillion over just a few years. One of the biggest opportunities to practice Patriotic Capitalism is investing in better jobs with fair pay, including broad-based employee ownership. Helping families of workers thrive is enlightened self-interest for business. Almost 70 percent of our economy depends on consumer spending. Paying a fair living wage increases income available for consumption and savings but also helps increase worker engagement, leading to greater innovation and productivity and powering more growth and profits. Enhancing the quality of jobs through worker engagement can increase innovation, productivity, and profitability by $13 trillion in market cap.
Each of the above categories has a pathway to superior financial and social returns.
Promoting Patriotic Capitalism
Interest in Patriotic Capitalism, whether called by that name or not, is slowly increasing because it has become abundantly clear that America needs a new blueprint to resurrect the opportunity and hope destroyed by Powell’s blueprint. Powell may have meant well, but the path to Hell is paved with good intentions.
Impact investing and stakeholder capitalism are natural evolutions of our market system—not anathemas to free market principles. Now, we need to leverage them in pursuit of Patriotic Capitalism for the good of our country, our communities, our national security and our planet. A thriving economy will follow.