“the purpose of an enterprise – to create goods and services for the common good – in society has been replaced by a purely functional enterprise philosophy, aimed at maximising profits”

The purpose of private enterprise never has been to “to create goods and services for the common good” however much Mr Schwab may wish that it has been or should be so in future. Getting your premises wrong is not a good start.

“Mr Schwab’s panacea solution? A deep transformation of business practices through an adoption of “stakeholder” theory as the ideal model for business.”

Great, set them up and see how they do in the market. After all, if Schwab is right these companies should do better than their competitors and then everyone will want to adopt the model.

Interesting, but seemingly based on some very broad definitions, key amongst which is the following (from the Guardian article):

Almost 40 years ago, I developed the “stakeholder” theory for businesses. This considers the enterprise as a community, with a number of social groups connected directly or indirectly to the enterprise which are dependent on its success and prosperity. These of course include shareholders and creditors; but employees, customers, suppliers, the state and the society in which the enterprise is active are stakeholders.

Now clearly employees, customers and suppliers are directly stakeholders in a business, their stakes being the respectively the labour they give, the money they spend and the resources which they sell. A well-run business will give consideration to all three (note that where monopoly conditions apply a business does not need to consider any stakeholders, and partial monopolies lessen stakeholder engagement).

But to claim state and society are stakeholders beyond this seems rather odd. Firstly, it reifies society to the point where it is something which is a) real and b) identifiable – a very positivist viewpoint. But this seems to ignore the fact that the component elements of society (individuals in their guises as employees, customers or suppliers) are already stakeholders. It also requires the identification of leaders or representatives of society, who can claim to speak for it. Perhaps society is shorthand for certain groups or institutions, but even so this removes the focus of the relationship from that between individuals (who, if employees say, can if necessary co-operate through a union) and an enterprise and rather imposes an amorphous unit with ill-defined and unprovable needs into the equation.

As for state, well it is a stakeholder through tax and regulation. It does not have further rights – for it exists to serve the individuals, not to exist beside them. If your argument is that enterprises have to have a communitarian outlook, how does this coexist with arguing the state has to have a role – if an enterprise has to reflect the community, so does the state surely? Unless you view the state as a separate entity to the people who it represents that is?

Essentially therefore, I think this is a silly idea because it assumes that society and state exist (itself disputed ground) and can have needs and concerns separate from those of the individuals who make up society and state. I find this quite worrying – it means that rather than individual choice, you are advocating collective action in the name of state or society; you are effectively saying that enterprises should serve the ideology of the state or the needs of ‘community’ without necessarily establishing that. This may appeal to some left-wing mindsets, but it seems to me to be essentially a way to increase state power and influence at the expence of the individual.

Unfortunately Mr Schwab’s panacea is at odds with the basic tenets of capitalism and, for that reason, represents fuzzy thinking (though I can see why it might appeal here).

As a blueprint for the future, it is an entirely useless analysis.

The problem that the banking crisis revealed has two aspects, both of which can be blamed on Government.

Firstly, over the previous twenty years, Governments allowed themselves to be corrupted by the corporates into allowing oligopolies to develop in banking and financial services which meant that normal market forces no longer applied. The only driver became growth by takeover of others- if you didn’t you would be swallowed up yourself.

That was a failure of market regulation.

Secondly, they did not allow the bankrupt banks to fail. They bailed them out and it is difficult to see how you ever make them believe they are not now beyond the reach of normal market forces. Without the risk of failure, what is the downside of taking everyone’s money and putting it all on red?

That was a failure of nerve (plus a degree of self protection).

The above is not to say that there is not a place for communally owned institutions to prosper within a capitalist system but they cannot do so by ignoring market forces and the need to be profitable.

The malaise is not with capitalism but with the functioning of the markets.

first half right (‘fixing’ bonuses ineffective) second half wrong (‘stakeholder’ model is utter rubbish – there is nothing about how it would actually work, how it would come about, what it would actually mean, other than blandishments)

as any fool know, there’s nowt wrong with profit maximization when it is aligned with “creating goods and services for the common good” and because it so often is, that’s why capitalist profit-centered organization has fared better that the rest. but as any fool also knows, this is only really true when capitalism operates within an institutional setting (laws etc.) designed to achieve this alignment. Furthermore, there are many things for which profit-max isn’t so great, which is where government and other non-commercial organizations come in. So we have a mixed economy. All this grand sweeping talk about deeper malaise with capitalism is hot air.

we do, however, have some deep malaise in the financial sector, consisting of the banks having a figured out how to extract surplus from the rest of the economy by a combination of rent seeking and heads I win tails you lose betting. We do need a real fix for this problem: crapping on about stakeholders isn’t it.

here’s some recent recommended reading on that subject

http://timharford.com/2011/01/what-we-can-learn-from-a-nuclear-reactor/

and here’s a lovely article on how to successfully mix high taxes and lots of government provided services with capitalism, as Norway does it.

http://www.inc.com/magazine/20110201/in-norway-start-ups-say-ja-to-socialism.html

Strictly OT but I am sure of interest to those who follow this blog.

Coulson’s gone. Wasn’t this predicted by someone on here recently although I think they were four days early?

As Falco said it not the point of enterprises to create goods and services for the common good. That is the point of the economy. However, profit maximising firms exist to generate a return to those who hold a claim against that return. There is plenty of room for mutual and employee owned models within the system. It is something I would like to see more of but you can’t impose it on all.

I agree that there is too much pressure in the Anglo-Saxon world on the short-term and quarterly results. Although that really is a feature of being listed. If a firm wants to raise capital from the public market then they are going to be hounded by investors to produce results. So stay private and issue fixed income bonds to raise capital. The contemporary fetish for shares is a pretty modern concept that only really took off after WW2.

Although our contemporary mixed economy gets criticised by left and right. It produces more and better goods and services for more people than any economy produced in our past. That is the whole point of the economy to raise utility. The second half of the 19th century was our economically freest and laissez-faire period in our history and it was crap for most people. Pay attention to the inside of homes in those old TV programmes from the 1950/60s and compare and contrast with now. Clearly state socialism did not work for most people. As I said, there is a place for more mutual firms but I do not think we are culturally cut out for the whole economy operating on that basis. Different nations should do what works for them. Chinese communist state capitalism has raised a remarkable 300 million out of poverty in less than 20 years but it would not work here.

OFF TOPIC…

Hey Sunny, can we have a post up about Coulson resigning please. I am sure all the tory trolls will want to condemn him for not resigning before, and letting this issue fester, seeing as they were so sure that every bit of tittle tattle involving a Labour Minister was a resigning issue.

I look forward reading how he should have gone as soon as the scandal broke, and how it reflects very badly on Cameron who chose to keep him on. I particularly look forward to reading all their points about how poor Cameron’s judgement has been.

@6 To be fair, during the 50s/60s we didn’t have all our goods being produced at a pittance by china and India using damn close to slave labour. Hell, the factory that produces iPads had to take the step of festooning it’s buildings with nets to try and catch ‘employees’ attempting to kill themselves. After all, in death they might get out of having to providing their labour.

“If management decision-making processes are decoupled from the responsibility of managers for their own risk-taking, the entrepreneurial system becomes perverted”

Regardless of whether the stakeholder model is the best replacement, this statement gets to the heart of it – though it seems to apply as much to individual traders as to managers. At present, bankers who take risks with other people’s money are insulated from any negative consequences. Just as competition is (ideally) meant to motivate innovation and quality, facing negative consequences for mistaken decisions motivates caution and responsibility.

The slave labour in China meme is a bit dated, Cylux. Those slaves seem to be buying a lot of cars since China is now the world’s number one importer of cars. Factory wages are rising at an astronomical rate: see inflation in China. Factory wages rose last year at just under 11%. The average factory worker is on a higher wage in China than Chinese university graduates.

“Hell, the factory that produces iPads had to take the step of festooning it’s buildings with nets to try and catch ‘employees’ attempting to kill themselves.”

i know all sorts of people love this story but the suicide rate at Foxxcom is actually lower than it is for the Chinese population as a whole….

@11 Is that including attempted suicides? Given that the factory in question is taking active steps to foil suicide attempts, just looking at figures for successful suicides is obviously going to skew the stats in their favour.

@10 http://m.gizmodo.com/5542527/undercover-report-from-foxconns-hell-factory

@13 Cylux

Foxconn have been a manufacturer of components for 30 years (“conn” is derived from connector, the bits of metal and plastic that formed their core business). Today, they are a massive assembler. The factories and residences are big towns — tens of thousands of people. Most of the workers are relatively uneducated and come from agricultural backgrounds (ie economic migration). Most expect to save some money and return home, but time will tell.

The residences are pretty shitty. As are the homes from which they came. Possibly better than accommodation endured by some migrants to the UK.

Foxconn plants are heavily mechanised; people perform the tasks that machines cannot. The company relies on workers who are motivated, not slaves. The factories are inspected regularly by western partners. Exploitation of workers may occur down the manufacturing chain at less mechanised companies. (If you are concerned about exploitation or premature mortality, start off with Chinese mines and steel works, and then work upwards.)

However, I think that Richard W is a smidge optimistic. Foxconn workers aspire to a scooter or motorcycle, not a car. Most of the money that they earn will be sent to family for the education of children, support of the aged or to develop the home. But the family is getting richer.

When I looked, the John Lewis Partnership – a “producer” cooperative owned by its employees – was doing well:
http://en.wikipedia.org/wiki/John_Lewis_Partnership

In fact, it was doing so well that the interesting question is about why there aren’t more producer cooperatives?

There is another way of looking at how businesses practise which does not require use of the word “stakeholder”.

Some businesses are established because the founders believe in demand for a product or service that the founders would use or buy. Lots of niche companies are set up to make something that a related company needs because nobody makes it quite the right way. Professionals and artisans establish their own businesses so that they can deliver something that meets their personal standards and those of customers. By definition, co-operatives and mutuals (should) meet this definition.

Then there are businesses that are established to meet a need, real or perceived, but in which the founders/owners have little interest beyond profit. Often they will be copycat companies or acquisitions to get a foothold in a market. Executives may have little emotional attachment to the product or customers, possibly isolating themselves from junior staff. Do Primark executives buy suits from their own stores?

Most businesses in the UK fall into the first category; the founders think that they can provide a service or product, not necessarily an extraordinary one, better than established companies. Many fail quickly and others hang around for decades (Morgan cars, Co-Op shops, building societies, your friendly plumber).

Elsewhere, Tim Worstall points to failure in Spanish mutual banking: http://timworstall.com/2011/01/20/so-we-really-should-nationalise-the-banks-then-eh/

I’ll argue that the Spanish mutuals failed because the executives lost the plot. They were not following the guidance of their founders and took risks. They were offering a service to investors and borrowers that they would not use themselves.

So I’m not going to argue for nationalisation or mutualisation with politically appointed executives. We need different forms of ownership. Example:
http://www.baxipartnership.co.uk/

It’s been often said that why the banks can afford to pay out such high earnings to their employees is because the banks receive an implicit subsidy from taxpayers who stand ready to bail them out to stop them failing as that can easily trigger a domino collapse of the financial system. Without that subsidy, banks would have to offer higher interest rates to their lenders, including their depositors.

But there are other reasons.

Alan Greenspan referred to one in testimony on 24 October 2008 to the US House of Representatives Oversight Committee:

“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”
http://online.wsj.com/article/SB122476545437862295.html

Here are some others in the news:

- Mis-selling securities in markets with gullible potential clients where information asymmetries are rife:

“The Financial Services Authority has hit Barclays (BARC.L) with a record 7.7 million pound fine for mis-selling two income investment products to more than 12,000 clients who lost money during the financial crisis.” [January 2011]
http://uk.reuters.com/article/idUKLNE70H03B20110118

- Insider dealing:

“The Financial Services Authority (FSA) today charged seven people with 13 charges in respect of conspiracy to deal on inside information obtained by the defendants from two major investment banks.” [March 2010]
http://www.fsa.gov.uk/pages/Library/Communication/PR/2010/059.shtml

- Undisclosed conflicts of interest:

“Goldman Sachs apparently failed to declare a potential conflict of interest which resulted in pushing up the cost of a £23.5billion bail-out of Lloyds Banking Group, City sources claimed last night. The allegation that the Wall Street bank may have put its own interests ahead of its British clients comes just a week after it was accused of fraud in the US.” [April 2010]
http://www.dailymail.co.uk/news/article-1268378/Goldman-Sachs-conflict-inflated-Lloyds-bail-costs.html

In other words, the high earnings paid to bankers are because the usual rules and laws of market capitalism are ignored.

There is a lot of truth in what you say Charlieman about the Spanish mutual Cajas straying too far from their roots. Just being mutual or publicly owned is no guarantee of success in finance if they are going to swim with sharks who quite simply know more than they do. For example, just like the Spanish Cajas, in Germany it was the publicly owned Landesbanks who have been most damaged by the financial crisis. They strayed too far from their purpose and bought a whole load of crap derivatives that they did not understand. The British building societies were lambs to the slaughter when they were swimming with investment banks who see them as country bumpkins with straw between the ears. The mutual building societies in the run up to the crisis were buying from the investment banks tons of stuff that they did understand and were totally oblivious to its true value. As an FSA whistleblower told Cable last year;

“I witnessed trusting and naive provincial building society executives and non-executives, who had no real understanding of securitisation or structured finance or any other aspect of the workings of global capital markets, being eaten alive by cynical, rapacious and short-termist investment bankers.”

That went on in every country in Europe, it was the mutuals and publicly-owned institutions who were buying a lot of the crap just before the crash. As soon as they stepped out of their comfort zone they were dealing with people who knew more than they did and were smarter.

“The second half of the 19th century was our economically freest and laissez-faire period in our history and it was crap for most people.”

It was a lot better than the first half, and streets ahead of the 18th. There are no short-cuts to economic prosperity.

@6: “The second half of the 19th century was our economically freest and laissez-faire period in our history and it was crap for most people.”

I’m unconvinced about both the claim made regarding laissez-faire and the claim regarding living standards as compared with peer group countries.

The first of the Factory Acts – an early recognition by Parliament that unregulated labour markets could lead to unacceptable outcomes – dates back to 1802 and a long succession of interventionist acts followed. In short, Parliament became increasingly disillusioned about the attractions of free market capitalism fairly early on:
http://en.wikipedia.org/wiki/Factory_Acts

The Education Act of 1870 created the basic administrative structures to provide universal primary education as it became apparent that education standards in Britain were slipping behind those in other western European countries as a conseqeunce of leaving schooling in Britain to the churches and to charities. Attendance in primary schools was made compulsory in 1880 – an explicit rejection of laissez-faire:
http://en.wikipedia.org/wiki/Elementary_Education_Act_1870

As for living standards:

“Throughout the period 1871-1938, the average British worker was better off than the average German worker, but there were significant differences between major sectors. For the aggregate economy, the real wage gap was about the same as the labour productivity gap, but again there were important sectoral differences. Compared to their productivity, German industrial workers were poorly paid, whereas German agricultural and service sector employees were overpaid. This affected the competitiveness of the two countries in these sectors. There were also important differences in comparative real wages by skill level, affecting the extent of poverty.”
http://www2.warwick.ac.uk/fac/soc/economics/staff/academic/broadberry/wp/solgeruk7a.pdf

This is the most comprehensive data set for average earnings in Britain that I can find:
http://privatewww.essex.ac.uk/~alan/family/N-Money.html

As best I can tell, by mid 19th century, average real earnings in Britain were better than those elsewhere in western Europe because of Britain’s pioneering industrialisation but after c. 1870 other west European countries were catching up or doing better.

Credit for starting a national welfare state must surely go to Count von Bismarck, first Chancellor of the German empire (1871-90), who launched not only state pensions for the aged but, in 1883, a social insurance scheme to cover personal healthcare costs:
http://en.wikipedia.org/wiki/Otto_von_Bismarck#Chancellor_of_the_German_Empire

This was the tentative beginning of the European notion of a social market economy.