How To Do Well In A Capitalist Economy

Plenty of business thought leaders are of the mind that capitalism needs to be refined. Some have mapped out possible routes for reformation, including A Kinder, Gentler Capitalism: Enterprise in a New Reality  (Ted Wachtel); Reimagining Capitalism in a World on Fire (Rebecca M. Henderson); and “How to Save Capitalism” (Jamie Dimon). Even Pope Francis has rebuked capitalism in its current form and function.

Much of what’s said about capitalism exists as foil to views of socialism. A 2019 Pew Research poll found “a much larger share of Americans have a positive impression of capitalism (65%) than socialism (42%).” But the nuances of these primary economic approaches are often misunderstood–as are the basic definitions. Capitalism is an economic and political system under which the means of production are privately, that is, owned by individuals. In contrast, Socialism is an economic and political system under which the means of production are publicly owned, that is, owned by the government.

If the main difference between them is the extent to which the government controls the economy, the question becomes whether it’s better to have more or less of that. Adam Smith, widely recognized at the father of free market capitalism, studied this question during a time when most economies were run by the government. In The Wealth of Nations, notably published in 1776, he explained why nations were better served by private ownership. His perspective of an “Invisible Hand” moving goods and services to their highest purpose, by individuals pursuing their own self-interest, was revolutionary. The growth of the United States in population and standard of living over the last 200+ years would seem to confirm Smith’s perspective. 

Let’s not forget that Smith was a moralist. He believed private ownership led business owners to truly serve their customers, leading to a more moral economy than one ruled by the government. But this approach did not eliminate all problems:

Monopolies: Companies that controlled various industries through anti-competitive behavior, where success was determined by thwarting competitors rather than serving customers. Legislation was born to limit this.

Fraud of one form or another: For example, the production of pharmaceuticals that had little to no value, with consumers who have no way to determine good from bad. Again, legislation paved the way for the FDA.  Today, mass media and social media tends to expose and consequently reduce fraud.

Concentration of Wealth: While some individuals flourished, others did not. In some cases, the level of poverty became a scandal. This led to a progressive tax system to fund entitlement programs.

It must be said that the term ‘capitalism’ is mired in historic frauds, like Enron and Kenneth Lay, WorldCom/Bernie Madoff, and the Wells Fargo customer account deception. This understandably leads to distaste for the whole operation. However, in each example, individuals committed fraud in a bid for short-term gains. And in every case, the result was a destruction of wealth for these companies, not improved value. Fraud is not a means to generate wealth. And most important, fraud isn’t limited to privately-owned companies.

Capitalism does lead to large variations in wealth. Those who work harder, or smarter, or take good risks and are luckier, generate more wealth than others. Those who begin with wealth generate more wealth than others. A number of notable capitalists–individuals who pursued what they felt was their own best interest–secured enormous wealth. Steve Jobs, Bill Gates, Warren Buffett, Jeff Bezos, and of course Elon Musk. There is no doubt that their concentration of wealth is tied to their individual success. But are the rest of us–the non-billionaires–better or worse off due to these, and other, capitalists?  

Their progress was propelled by serving their customers well. They provided jobs, growing the workforce. They paid employee, property and income taxes, funding government services. And what if these private owners’ only interest was to build wealth? Would they still have served their customers well, provided good jobs, and paid taxes? Of course–because doing these things is foundational to building wealth. Virtually all have become philanthropists, donating sizably to meaningful causes. As Adam Smith suggested, sustaining private ownership and wealth generally necessitates doing morally correct things. If the outcomes of capitalism have changed, the essential relationship between capitalism and morality remains what it was in 1776.

This relationship depends, in part, on the everyday business owner and what they choose to do inside the capitalist economy. So, what does that mean for you?

• Are you serving your customers well, continually striving to better address their needs?
• Are you making the company’s economic goals clear to every employee?
• Are you transparent with your employees about the company’s performance?
• Are you sharing wealth with your employees, improving their standard of living?
• Are you encouraging employees to contribute their ideas to improve results?

If you’re nodding along, you’re doing good business. You’re also running a business that’s strong in Economic Engagement. (Our research with the Harvard Business School shows these five drivers leads to profits that are double those of your peer group. If you would like to see how your company stands on Economic Engagement versus other Inc. readers, and learn how to improve, just complete this 10-minute survey.)