July 27th, 2022
Review: Stakeholder Capitalism
Klaus Schwab fails to understand that shareholder capitalism, has not proven so successful "despite" its profit-seeking motive but precisely because of it.
Stakeholder Capitalism argues that the only way to solve society’s most burning questions, such as climate change, inequality, and political polarization, is to move away from Milton Friedman’s model of narrowly profit-maximizing corporate ethics towards a model of socially and economically conscious welfare-maximizing corporate ethics. Although I think that Friedman’s model can be taken too far, I vehemently disagree with the author’s conclusion that the model should be abandoned for multiple reasons. I think that the best way to tackle such problems that arise from capitalism is to combine profit-maximizing business practices with effective government regulation and redistribution that minimizes the destructive externalities of unhampered competition. What is wrong with stakeholder capitalism, then? For one, I would not trust the Davos elite to act as a group of superheroes to save the world. Power corrupts and Davos power corrupts absolutely. I would prefer them to focus on more narrowly defined, but also more honest and straightforward tasks, including profit-maximization (within the enforcement of clear regulatory standards) and the advancement of concrete social and environmental aims through the political process, rather than trying to turn their businesses into deliberative vehicles for social and environmental activism. After all, either the embrace of corporate social responsibility of companies stems from a real desire to change the world, or else it stems from a desire to put up a lucrative act that increases their brand value. In the first case, their well-meaning energy would be better served in the pursuit of more concrete political and social remedies, and in the latter case, it amounts to nothing but hypocrisy. Nonetheless, I found the book insightful. It is full of interesting (although rarely novel) data points that reflect Schwab’s unprecedented access to the academic, political, and business worlds. But who, exactly, is this Mr. Schwab, to have such elite access?
Klaus Schwab was a rather unknown figure until recently. He has acquired infamy ever since right-wing conspiracy theorists like Alex Jones and James A. Lindsay have joined the chorus of left-wing critics of globalization like Naomi Klein and Rutger Bregman to condemn Davos, although for widely different reasons, as a corrupt seat of unearned power and privilege. But the real secret behind the World Economic Forum is NOT that it is engaged in an elitist ploy to control the world or that it already secretly controls it. (It does not.) The real secret is that WEF is a lucrative business model for Klaus Schwab, an innovative political entrepreneur. It is pretty impressive how Schwab has turned Davos into a global hub of elite networking, brainstorming, and visionary conversations. Schwab is no dunce. In fact, he is a serious scholar with some undeniable skills as a facilitator of interdisciplinary meetings where people can discuss various “weak signals” (emerging policy topics) that most ordinary people know little about but will come to know in due time.
I do not recount all this background to cast aspersions on Mr. Schwab, nor to deflect from the book’s interesting contents, but to argue that the book contains many clues that it must be understood in the context of its author as the father of the Davos meetings: 1) World leaders are treated with sometimes embarrassing reverence and political correctness; which is explained by the fact that Mr. Schwab clearly wants to remain on good speaking terms – and indeed on good business terms – with all the world leaders in the global West, East, North, and South. For example, Chinese totalitarianism is downplayed while its economic successes are extolled. Likewise, there is little effort to highlight the importance of individual freedom in the Western sense. Indeed, the central message is tailored to appeal to broad constituencies and various ideologies. The reason is that the Davos elite does not want to hear that it should not be in charge of changing the world for the better. Indeed, it wants to hear that it is virtuous if it further tightens its grip on power. 2) As a result, the action agenda of the book is rather schizophrenic, because although it pays lip service to widespread citizen participation, including by environmental groups led by people like Greta Thunberg, most of the examples of meaningful social change towards stakeholder capitalism are taken from among the business elite and the political elite: we hear from the bold actions and visionary leadership taken by CEOs of big companies like Siemens, Google, and Maersk, as well as by the prime ministers and presidents of various countries around the world. Indeed, Schwab’s vision of stakeholder capitalism borrows the language of the bottom-up vision of grassroots deliberative democracy (the left-wing definition of the term) in the service of a top-down vision of compassionate business ethics or “capitalism with a human face” which emphasizes, above all else, increased “corporate social responsibility” (the business school definition of the term).
The book, in its essence, is an insightful and often nuanced but ultimately self-serving and politically dangerous call for the business and political elite to showcase leadership not just in business and politics but also in ethics and progressive social change. It reflects an impressive confluence of real academic and economic insights about coming disruptive social changes, including those caused by The Fourth Industrial Revolution (which is the title of one of his previous books), with more pragmatic interests of the business and political classes. Ideologically, it leans more on the center-left agenda of morally guided capitalism, but even more than that, it caters to the pecuniary interests of the business world and the power interests of the political world, by selling them a vision where virtuous Davos billionaires save the world. The problem is not that it tries to make billionaires to do better; the problem is that it sells them a misguided vision that almost completely ignores the problems with central planning (as pointed out by people like F.A. Hayek and James Buchanan). It fails to understand that shareholder capitalism, whatever its flaws (and they are many!), has not proven so successful “despite” its narrow profit-seeking motive but precisely BECAUSE of it. The ability of capitalism to harness the unintended consequences of self-motivated actions is its greatest gift that is easy to misunderstand. And Schwab, unfortunately, contributes to this misunderstanding. Lastly, the book also fails to understand that problems like climate change, inequality, and political polarization are better tackled through effective government regulation and redistribution combined with civil society efforts. Stakeholder thinking may be occasionally useful but it often causes gridlocks that are avoided if local actors are granted autonomy to engage in free actions. So, I cannot recommend the book for its conclusions, but the historical analysis and future prognosis that it uses to reach its conclusions are sufficiently interesting, polymathic, idiosyncratic, and concurrent to be worth recommending for anybody who wants to understand what challenges lie ahead.
The views expressed on austriancenter.com are not necessarily those of the Austrian Economics Center.
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