Smart Capitalism for a Better World

What happened to our economy?

There is a growing gap from the middle class to the rich. The growing income inequality has slowed economic growth and angered many politicians.

What caused this?

The mis-belief that a company’s only mission is to get the most profit in the short-term for shareholders.

This isn’t capitalism, this is a choice.

This short-view profit practice began in the early 1980s. Although necessary back then, today changes need to be made in order to boost our economy.

Mindset not long ago had business owners and managers making different choices.

They understood their responsibility to make better choices, which made things better for the average American and the economy.

In 1951, Frank Abrams from Standard Oil said, “The job of management, is to maintain an equitable and working balance among of the claims of the various directly interested groups… stockholders, employees, customers, and the public at large.”

This resulted in everyone benefiting and not just one person, or a handful of shareholders.

This good balance, though the last couple of decades have suffered. In the 1970s and 1980s, greed took over and today it is still going strong. An all too common practice for American companies is to serve a single constituency, the shareholder, while not taking due care of employees or investing in the future.

The gap between profit and wages are more evident than ever.

Profits for corporations are near their highest level ever. This increase has been going on for over 15 years, while profits have increased, corporate wages have decreased and are now at an all-time low.

Our economy hasn’t only been adversely affected by serving the shareholders.

The 1% of the richest Americans, own almost 45% of the country’s wealth. This is staggering, as now these Americans in 2013 had an average net worth of $14 million and 90% of the population had their wages go down to $80,000.

Americans who work for these profitable corporations typically are below the poverty line and 50% of them own nothing.

Except for the richest Americans, most employees spend almost everything they make. These employees are consumers and account for about 70% of the spending. The more they spend the more it drives the economy.

This means that if they get paid more, they spend more. The flip side to this is, if they get paid less, they spend less, which slows economic growth.

[Tweet “When we are paid less, we have less to spend, and economic growth slows.” ]

When we are paid more, we spend more, and growth accelerates.

This spending is also directly tied to how businesses invest. When consumers are tight for money they spend less, meaning companies hang tight to their money, or give a little extra to shareholders.

But when consumers have extra money it allows businesses to spend more so they can meet the demand of the cash-rich consumers.

The “profit motive” of Capitalism helps drive the best economic system.

Being worth $500 million a year as a hedge fund manager is great news.

The problem occurs when wealth becomes so concentrated that it doesn’t spend. The wealthy can only buy so many cars, islands, and houses, which means only a fraction of their money gets injected back into the economy.

You’ll hear economists list many factors that have contributed to the decline in wages and increased profits. Some of these factors over the past few decades are a decline of unions, less high paying manufacturing jobs, a larger skills gap, and globalization.

These trends are real. The problem is often we forget the real cause.

It’s true that many company owners are choosing to maximize short-term profit by paying their employees as little as possible.

How do we fix this?

The revolution has started; many big companies are voluntarily increasing their employee’s hourly pay. Now although a step in the right direction, it still has a way to go. Because some employees can still work full-time hours and be below the poverty line.

Corporations are creating more value for their customers, employees, society in addition to their shareholders by emphasizing their need to have a triple or even quadruple bottom line.

The world’s largest asset managers, BlackRock, now expects companies to create value across multiple dimensions.

BlackRock CEO Larry Fink wrote, “Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance but also show how it makes a positive contribution to society.

Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”

Isn’t that better capitalism? Mightn’t it make the world a better place?