Sustainable Vikings Chapter 2: Capitalism 101
The following is Chapter 2 from the in-progress book “Sustainable Vikings: What the Nordics Can Teach Us about Sustainable Capitalism & Building Resilient Societies” authored by the CRB Executive Director Robert Strand. This book serves as the base text for the Haas undergraduate course “Sustainable Business in the Nordics” and Haas executive MBA course by the same name. This is a work-in-progress so please leave your feedback and suggestions for improvement in the comments section!
“Fundamentally, there are only two ways of coordinating the economic activity of millions. One is central direction involving the use of coercion—the technique of the modern totalitarian state. The other is voluntary cooperation of individuals—the technique of the marketplace.” —Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 2009) 13).
What is capitalism? I am a bit embarrassed to admit that I have not thought too deeply about this question until relatively recently.
As a kid growing up in America in the 1980s, I knew that capitalism was associated with the United States and that communism was associated with the Soviet Union. I saw the movies The Day After (I still have nightmares about that one), Red Dawn (with a young Patrick Swayze!), and Rocky IV, and I knew that I wanted nothing more than to beat the Commies. I associated capitalism with freedom, democracy, prosperity, and optimism. I associated communism with control, gulags, and gloom. In short, capitalism: good; communism: bad.
Upon further reflection, maybe I should not be too ashamed of my delayed deeper inquiry into capitalism. In the United States, people more or less take for granted the concept of capitalism (at least the US variety). Even in my American MBA curriculum, I never explored the fundamentals of capitalism, nor did I profoundly consider one of capitalism’s most basic and influential tools—the publicly traded corporation—in spite of the fact that many of we MBA types would join the ranks of public corporations and even lead them. My experiences in corporate America, particularly during my time in investor relations, opened my eyes to the incredible short term–ism of US public corporations and the extractive nature of Wall Street investors, which exerted incredible pressure on the corporations’ management teams to show quarterly profits. Still, I did not have a good grasp of what capitalism meant.
Seymour Martin Lipset, one of the most influential social scientists of the twentieth century, quipped, “Those who only know one country, know no country.” During my PhD studies, I took an influential course from professor Andy Van de Ven, who taught, “We learn best through the comparative method.” If you want to really understand something, you can’t just study it in isolation; you must study it in comparison with something else. Professor Van de Ven put this qualitative comment in statistical terms, articulating that “an n of 2 is infinitely more powerful for our understanding than an n of 1” where n refers to sample size. So the n-of-2, US capitalism–versus–Soviet Union communism comparison is helpful for fleshing out an understanding of the basics of capitalism.
What Is Capitalism?
The ideas surrounding capitalism and communism represent polar opposite systems in which a society organizes its economy and, by extension, the everyday life of its people. Within the efficiency-equity-sustainability framework, capitalism focuses expressly on efficiency. At its core, capitalism involves the private ownership of capital and allows the owners to extract a profit through the efficient use of their capital. By “private,” I mean an individual or a privately held corporation. In contrast, in communism, the state (i.e., a nation) owns the capital. In their ideal states, or theoretical form, capitalism concentrates power in the hands of the private sector, while communism concentrates power in the hands of the state. Given that the word “capital” comprises precisely 70 percent of the letters in the word “capitalism,” it’s worth asking the question what is capital?
Capital is directly associated with the expression “the means of production.” This is straight out of the mouth of Karl Marx (1818–1883), the nineteenth-century German philosopher who, with Friedrich Engels, coined the term capitalist (German: kapitalist) to refer to a private owner of capital that gave birth to the expression capitalism. Marx is considered the father of communism and is arguably history’s greatest critic of capitalism. When Marx spoke of the means of production, he was referring to the factories that make things of value: cars, boots, guns, butter, whatever. Capital also refers to the natural capital: land and whatever may be on it (trees, water, and animals), or under it (oil and minerals). Additionally, capital can refer to property in the form of intellectual property (IP) that is an invention or piece of work that is patented, trademarked, or copyrighted. So when we talk about capitalism, we are talking about the ability of a private individual or corporation to own capital.2 Another central feature of capitalism is that the owners of the capital can sell what they own, produce, or rent for whatever price they can get and keep the profits for themselves. Profit is a function of price whereby it raises the question who sets the prices? The answer is the market. The market, or free market as it is often called, also determines the quantities of goods and services produced. The market for a particular good is represented by those good old supply-and-demand curves that you might be familiar with if you’ve ever taken an economics class.3 In the graphic below, you’ll see a price (P1) and quantity (Q1) at the intersection of the Supply curve (S) and the Demand curve (D).
This figure could represent anything, but let’s say it represents butter. The Supply curve depicts the owners of the capital (the butter factory owners4), and the Demand curve represents all the rest of us, who want to buy butter (the consumers). The Supply curve goes up as it moves to the right because butter factory owners will want to produce a greater quantity of butter as the price increases, as that means greater profits. Conversely, the Demand curve goes down as it moves to the right because the consumers will demand a lower quantity of butter the more expensive it is. At the intersection, we have market equilibrium, which is the ideal market price and quantity for butter in a nation. This is considered the most efficient level of output.
The Scottish-born Adam Smith (1723–1790) is widely hailed as the father of modern economics. In fact, famed twentieth-century economist Milton Friedman wrote, “The founder of our discipline as we view it today was Adam Smith.”5 His free-market ideas and espousal of a “laissez-faire” approach facilitated the spread of capitalistic principles throughout the world. Laissez-faire is a French phrase that translates to “allow to do,” which here refers to the philosophy that we should allow the free market to do what it does without intervention by the state. The expression purportedly originated during a meeting around 1681 in France in which a group of French businessmen were asked by a representative of the state how the state could best serve the promotion of commerce, and the businessmen allegedly replied, “Laissez-nous faire,” which effectively means “Leave it to us”—as in “Butt out, state; let the businessmen run things.”6 (US President Ronald Reagan was a fan of the expression laissez-faire. He offered his own rendition of it in 1986 when he stated “The nine most terrifying words in the English language are: I’m from the Government, and I’m here to help.”7) Laissez faire as an economic philosophy involves the respect for private property, the freedom to start and own a business, the reliance upon free markets to set prices and quantities, and the encouragement of free trade with limited regard for national borders (i.e. limited protectionism).Laissez-faire became a philosophy encouraging minimal involvement by the state and freeing capital owners to do as they wish. The most well-worn phrase drawn from Smith’s volume of work is undoubtedly the single line from his most famous publication, The Wealth of Nations (1776), “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”
Here, Smith indicates that the potential for individual profit is the underlying motivation for the effective production of goods in a society. Smith’s baker does not produce bread with the primary motivation of feeding his community, but rather does so to make a profit and first feed himself and his family. Nevertheless, the outcome is good for all, as the community has bread through the baker’s pursuit of self-interest. Smith posited that free markets allow the goods deemed most necessary in a nation to command the highest price, which leads to greater production of those goods as individuals seek to realize profits, and that the resulting greater supply of those goods will ultimately reduce their prices. The overall result for a society is that essential goods will be produced as efficiently as possible for as low a price as possible.
Smith’s other well-worn idea is that of an “invisible hand” of the free market, though he deployed the expression only once in The Wealth of Nations. Smith wrote these words some 250 years ago in a manner that may feel a bit inaccessible, considering today’s language. Because the invisible hand is such a central metaphor of capitalism, I offer the extended quote below. I have italicized some key elements in an effort to emphasize Smith’s primary message here: that a society is better off when it is systematically structured with markets than it would be if each individual attempted to do good for society on his or her own. With respect to the aforementioned baker, Smith would contend that a society coordinated around markets is more likely to produce a sufficient amount to feed its people than a society without markets that appeals to the goodwill of its populace to produce bread.
But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavors as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labors to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it.
By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.
In sum, we call it capitalism when these three questions are generally answered as follows:
- Who owns “the means of production” (i.e. capital) and takes the resultant profits (or losses)? The private sector.
- Who sets the prices for goods, services, and labor (i.e. wages)? The market.
- Who sets the quantities of goods, services, and labor (i.e. employment)? The market.
What Is Communism?
“Communism” derives from the Latin word communis, which means “shared” or “common.” Within the efficiency-equality-sustainability framework, communism focuses on equality, with an expressed desire for equal outcomes for everybody. At its core, communism entails the elimination of private ownership of property. This results in the state’s owning all capital in a nation and centrally planning all production of goods. Karl Marx coauthored the widely influential Communist Manifesto with Friedrich Engels (1848) and wrote the treatise Capital (1867), in which he proposed that the exploitation of labor by the owners of capital was the fundamental driving force underpinning capitalism and as such must be replaced.9
Marx was angered by the growing inequalities between the rich and the poor—i.e., between the capital owners and the laborers—and by laborers’ subsequent ever-diminishing freedom to determine their own destinies, which he saw as the inevitable result of capitalism. In the capitalistic system, Marx identified that capital owners could extract higher rates of return on their capital than what laborers could receive for their work. Capital owners had all the power, and they wielded it against exploited laborers. So, according to Marx, the gap in wealth between a factory owner and the people working in the factory would only grow and grow and the concentration of power in the hands of the capital owners would further intensify. Marx saw the capital owners as a class of people rewarded not necessarily for their hard work, but rather for the simple fact that they owned the capital.
Furthermore, Marx believed that the ruling class and capital owners were inextricably linked, oftentimes even within a single family, and that the rules were stacked against working-class laborers. He envisioned a continuously increasing concentration of capital and power in the hands of the few as capital owners engaged in a power battle with one another in which only the strongest survived. Therefore, he suggested, wealthier capital owners would eventually gobble up less wealthy capital owners. As power and capital landed increasingly in the hands of the few, the divide between them and the growing exploited working class would become so great, Marx forecast, that a series of revolutions would be inevitable and would ultimately result in communism’s supplanting capitalism on a global scale.
The mechanics of communism require the state to effectively do everything the free market covers under a capitalistic system. This translates to the establishment of a central planning group that oversees the means of production (e.g., the factories) and determines the quantities to be produced (i.e., supply) based upon the group’s assessment of quantities needed (i.e., demand). Moreover, the state sets prices using something called a state price commission. Some people therefore also refer to communism as a planned economy or a command economy. In a communist nation, all “profit” generated goes to the state to be, in theory, distributed equitably among the people, to achieve equal outcomes. Expressions of equality are central to the vision of communism that Marx espoused.
In sum, we call it communism when these three questions are generally answered as follows:
- Who owns “the means of production” (i.e. capital) and takes the resultant profits (or losses)? The state.
- Who sets the prices for goods, services, and labor (i.e. wages)? The state.
- Who sets the quantities of goods, services, and labor (i.e. employment)? The state.
Communism in Practice
The Soviet Union was born with the intent to put Marx’s ideals into practice. With its roots in the 1917 October Revolution led by Vladimir Lenin, the Soviet Union formed in 1922 as a union of Russia, Ukraine, Belarus, Armenia, Azerbaijan, and Georgia. The Soviet Union would annex more countries, for a total of fifteen nations. Planning was centralized in Moscow.
The Soviet Union—i.e., the state—seized private property and nationalized all capital. It follows that prices for all goods produced would be set by a state price commission based in Moscow, where the price was often physically stamped into the product itself. The central planners in Moscow were responsible for determining the intended production quantities for the entire Soviet Union. Practically speaking, this meant that the development of five-year plans to be carried out at factories spread throughout a massive geographical expanse. Lastly, all “profits” were intended for the state.
During its almost seventy years of existence, until its ultimate dissolution in 1991, the Soviet Union would become the world’s second-largest economy, behind only the United States, and boasted the world’s largest standing army. And yet, by virtually every measure, it was a failed experiment that exposed the false promises of communism and the hyper-inefficiencies of attempting to establish a centrally planned economy. Almost four million Ukrainians alone died from famine in 1932–’33,10 and these kinds of atrocities would repeat themselves throughout the history of the Soviet Union. Famine, lack of basic necessities, forced labor camps, propaganda machines, and the near-complete strangling of democracy is the communist Soviet Union’s legacy. What began with promises of equality and improved qualities of life for laborers across the empire resulted in the suffering of millions, while only the very few, those members of society employed by the state, benefited. The rise of communism defined the global politics of the twentieth century through the Cold War battle between the capitalistic United States and the communistic Soviet Union.
Throughout much of the twentieth century, the Soviet economic machine appeared to be marching ahead with success and thereby making communism increasingly attractive throughout the world. The most widely used university textbook in economics in the U.S. in the 1960s, written by the Nobel Prize recipient Paul Samuelson, predicted the national income of the Soviet Union would overtake the U.S. possibly by 1984, but probably by 1997. A 1980 revised edition did little to change the analysis other than to push back the dates to 2002 and 2012.11 But the apparent economic successes of the Soviet Union were fueled by a trampling of freedoms. Economically unproductive rural populations were forced by famine or gunpoint to move to industrial zones where these people were, at least initially, more economically prosperous that resulted in remarkable economic growth on the macro scale. After the mass migration of people from rural to industrial zones was largely completed, the growth stagnated. Fueled by extraction and coercion that would prove itself ultimately unsustainable because little to no growth was to be had after the initial transition from the rural dwelling folks moved to the industrial zones – or were forced to move and work in the factories. 6% annual economic growth through the 1950s that gave the appearance of Soviet success but was due to rural famine and forced movement of people to work in the factories. That mass transition fueled extraordinary economic growth but once the rural to urban transition had taken place there was no growth as there was no innovation and productivity was dismal and freedom or democracy was being trampled. The Soviet propaganda machine did all it could to keep these realities from the world but ultimately the reality that communism cannot effectively produce what it promises was made readily apparent to the world with the dramatic collapse of the Soviet Union in 1991.12
Since the fall of the Soviet Union, communism has been on the decline. Today, only five countries can be characterized as communist: China, Cuba, Laos, North Korea, and Vietnam.13 Even within them, shifts toward some capitalistic principles are apparent and have significant benefits. Thirty-six million people starved to death from 1958 to 1962 in communist China as a direct result of communism.14 In the forty years since 1980, through greater support of capitalistic principles and freer markets, more than seven hundred million people have been lifted from absolute poverty in China.15 This represents the single greatest example of poverty alleviation the world has ever known, and it’s thanks to less communism and more capitalism.
North Korea is the stalwart that serves as a continued example of communism’s failed promises. With the exception of a tiny dot of light that is the capital city, Pyongyang, North Korea goes virtually dark at night. North Korea operates so inefficiently that it literally cannot generate enough electricity to keep the lights on. Life there involves regular famine, grave human-rights abuses, an extreme concentration of power in the hands of its “dear leader,” and the overall trampling of freedoms.
It raises the question of why capitalism is such a better engine for efficiency, whereas communism sputters and ultimately fails? The shortages of basic necessities—including bread and toilet paper—that were commonplace throughout the history of the communist Soviet Union indicate a fundamental problem with the system of communism to efficiently provide the most basic of necessities. In practice communism results in worse outcomes for most citizens because a planned economy is hyperinefficient. When we consider that central planners in the former Soviet Union had to create a five-year production plan for a region spanning some eleven time zones, it’s no wonder that shortages were the norm.
I learned firsthand why capitalism beats communism in my first job out of college in 1999 through my role as labor-and-capacity planner for the world’s largest IBM manufacturing plant, based in Rochester, Minnesota. Had I attempted to plan and then strictly control the production for a single IBM factory over five years period—let alone one year, or even one month—the results would have been disastrous. The further in advance I attempted to rigidly plan the factory floor, and the more control I tried to exert by pushing production according to my rigid plan, the worse the results would be, largely because efficiency and heightened levels of productivity are better achieved through flexibility and freedom than through rigidity and control. The world is ever changing amid constant deviations, and factories are merely microcosms of that pattern. Raw materials do not arrive on time; equipment goes down; workers may be out sick; over time, innovations make some product obsolete and overall demands shift; and the list of deviations one could encounter, as deviations are a reality of the production process, goes on. These deviations are tamed not through control but rather by building a resilient system.
A big part of accomplishing this goal is to empower laborers with greater freedom to move to where work needs to be done. I learned this from studying production systems in Japan. The most productive factory floor someone could design was one that drew directly from the lean manufacturing principles that Japan began to practice beginning in the 1970s. This was a factory built on the notion of “just in time.” Rather than a “push” system where production levels were effectively pushed into production on the manufacturing floor based on some preconceived production plan I had developed months before, we would instead “pull” product through the factory floor using a series of kanbans to better meet demand in more real time. Kan is the Japanese word for “visual,” and ban is the word for “card” (as in a notecard). The system was simple, visual, and flexible, and it dispersed decision-making power among factory laborers so that they could move to where the work was, rather than concentrating it all in the hands of the planner.
I also discovered a much more subtle, but significant, relationship between freedom and the motivation of the people who made up the labor. With greater freedom came greater levels of motivation and overall job satisfaction. Years later, I read Daniel Pink’s Drive: The Surprising Truth About What Motivates Us, in which Pink surmises that freedom (which he referred to as autonomy), along with mastery and purpose, is one of the greatest motivators for people.17 When they feel as if they are controlled and have limited to no freedom of their own, they are not motivated. Conversely, when we set up the factory floor in a manner that made visible the places where work needed to be done, and when people on the floor were empowered to move toward the work, they had a greater degree of autonomy—and purpose, for that matter—and were more motivated, and muda, or waste, was reduced.18 It turns out that this is exactly the sort of environment that encourages innovation, because when people have freedom—and are not locked down as slaves—they are more likely to explore their curiosities and innovate. Freedom is a key element for innovation. This all results in a more productive and profitable system.
My time as a labor-and-capacity planner for this lone factory drove home for me why the communist Soviet Union experienced continued shortages. Planning and controlling a factory floor is a recipe for disasters of efficiency; planning and controlling an economy is infinitely worse. A central planner in Moscow would have no idea what was going three thousand kilometers away at a production factory in Kazakhstan. Planning for agricultural goods is even more difficult where conditions like weather are far more variable than those inside a factory.19
Conversely, from a production standpoint, a capitalistic system is similar to a factory floor designed with lean manufacturing principles. Instead of a “push” system like communism, capitalism is a “pull” system where actual demand is a central factor in quantity produced. Furthermore, profit incentives encourage efficiencies to be realized. Production intended simply to meet a quota, decoupled from real demand, invariably results in greater muda, or waste, which translates to greatly reduced productivity and profitability.
Publicly Traded Corporations
Humans have engaged in commerce since prehistoric times, when people first came together to exchange goods. Unk had a nice rock but really needed a stick, and Ork had a stick but had a greater need for a rock. An exchange occurred, and value was created for both people. The word “commerce” is derived from the Latin word commercium, from cum (“together”) and merx (“merchandise”). Companies represent formalized organizational structures with the express purpose of conducting commerce. Some companies that exist today are more than one thousand years old, like the Japanese hot-spring hotel Nishiyama Onsen Keiunkan, which was founded in 705 and claims to be the oldest hotel, and perhaps the oldest operating company, on Earth.20
More recently, a special type of company has appeared upon the global stage: the publicly traded corporation. Logos of the likes of McDonald’s, Amazon, Facebook, Walmart, Coca-Cola, and Exxon are ubiquitous symbols of capitalism in our everyday lives. Publicly traded corporations have existed on this planet for just a blip of human history—only four hundred years, starting with the Dutch East India Company, established in 1602. It undertook the world’s first-ever initial public offering (IPO) to quickly raise the large amount of money it needed to become a global company profiting from the spice trade. This represented the first time that shares of a company were made available for sale to the general public; the holders of these shares were thereafter known as shareholders. Previously, in order for someone to invest in a company, that person either had to start their own company or have a special relationship with the owner of a company (i.e., a relative or a friend) who would allow the person to invest. Structured as a public corporation, the Dutch East India Company enabled individuals unknown to the company to invest their money in it, in exchange for a percentage of equity.
Not until the 1900s did public corporations become a fixture in people’s everyday lives.21 Standard Oil Co. Inc., established by John D. Rockefeller and Henry Flagler in 1870 as a public corporation in the United States, quickly ascended to become the world’s largest oil company and made Rockefeller, its major shareholder, the richest man in the world. In 1911, the US Supreme Court ruled that Standard Oil was an illegal monopoly and forced it to be broken up into smaller companies. It successors include ExxonMobil and Chevron, which remain among the largest companies in the world.22
Over time, the public corporation has rapidly proven itself a remarkably powerful structure that can attract large investments to enable expeditious growth. So, how exactly does a publicly traded corporation differ from a regular old company? The greatest point of distinction is that a public corporation separates ownership from management. Consider the baker from Adam Smith’s time. He owned and managed his little bakery. The owner and the manager were one and the same. The public corporation dramatically changed this dynamic, as shares of the company were sold on the open market to anyone (or anything) that could pay the going market rate for shares. Ownership and management got separated. (Sure, some of the management and other employees of the company may own shares, but the vast majority of ownership typically resides outside the company, in the hands of investors.) This development fundamentally changed the owner’s role from that of a steward to that of an extractor.
In the case of Adam Smith’s baker, the owner is steward of the company and a member of the community. He knows the faces of his stakeholders. Just across the Mississippi River from Fountain City, where I grew up, is the modern-day version of Adam Smith’s baker, who serves as a useful example of the differences between the company Smith described and the modern-day publicly traded corporation. Bloedow’s Bakery was founded in 1924 by Ernest and Mary Bloedow, and in the almost century since, the bakery and its people have become embedded members of the Winona community. A couple of decades later, the Bloedows’ daughter, Mildred, and her husband, Julius Gernes, assumed ownership and management of Bloedow’s Bakery. That continued until 1984, when Mildred and Julius’s son, Ernie, and his wife, Darleen, took over Bloedow’s. In 2004, the bakery was sold to the first owners outside of the Bloedow family, Hugh and Mary Polus. But Hugh had been a baker at Bloedow’s since the age of fifteen, and Ernie and Darleen had mentored him for almost twenty years to continue the Bloedow tradition. Both Hugh and Mary are native Winonans who grew up eating at Bloedow’s. (I did too.)
Over its one-hundred-year history, we can readily count the number of Bloedow’s owners, who have consistently maintained a staff of a few dozen people. People in Winona frequently speak of Bloedow’s with emotion, as if the bakery is a valued community member. In a 2005 Winona Daily News article, co-owner of the local grocery store Midtown Foods said, “Winona loves Bloedow’s, period,” as he described how Bloedow’s Bakery resisted efforts by the multinational doughnut corporation Krispy Kreme to enter the Winona market.23
Just up the Mississippi River from Bloedow’s Bakery resides another Minnesota baker born in the 1920s. General Mills launched as a publicly traded corporation on the New York Stock Exchange on November 30, 1928.24 While they share roots as Minnesota bakers, when it comes to ownership, General Mills and Bloedow’s Bakery could not be more different. Attempting to understand who General Mills’ “owners” have been throughout the company’s history is simply impossible. Even understanding who the current owners are is, frankly, impossible. General Mills presently has about six hundred million shares outstanding.25 Institutional investors represent the major owners of its shares (8 percent by Vanguard Group Incorporated, 7 percent by BlackRock Incorporated, 6 percent by State Street Corporation, 3 percent by Invesco, and 3 percent by Massachusetts Financial Services Company, for example26); those institutional investors are not real people, like Ernie and Mary Bloedow, who were embedded in the community in which their bakery resided. Rather, these institutional investors buy and sell shares on behalf of people from around the world in an effort to maximize their returns. These people, the so-called owners of General Mills, are anonymous and often likely not even aware that they may own any shares of General Mills. I suspect that I likely own a portion of General Mills because I invest my meager savings almost exclusively in index funds, and my employer is also investing in funds of this nature as part of my pension. But I honestly do not even know if I am an “owner” of General Mills, and if I am, my concern is focused solely on maximizing financial returns. Ownership of a publicly traded corporation is dispersed and largely anonymous. And there is no accountability on the owners’ part beyond their market gains and losses.
This is a very different type of ownership than what Ernest and Mary Bloedow experienced. Their personal reputations in their community could flourish or flounder in nearly direct correlation with the reputation of Bloedow’s Bakery. My reputation has no tie with General Mills or with any of the other publicly traded corporations in which I may be invested via one of my index funds. In the case of a publicly traded corporation, the owners are much more likely to have an extractive relationship with the company—to care solely about extracting a profit. The owners of Bloedow’s Bakery, however, have with their company a stewardship relationship, which is closely related to a longer-term view.
Capitalism, Freedom, and Power
Milton Friedman’s classic 1962 book, Capitalism and Freedom, makes the case that capitalism and freedom are two sides of the same coin. In his view, capitalism, freedom, and democracy are inseparable, just as communism is inseparable from diminished freedoms and an undermining of democracy. “One may believe, as I do,” he writes, “that communism would destroy all of our freedoms,”27 and “a society which is socialist cannot also be democratic.”28
The aspiration to achieve freedom for the individual is central to Friedman’s writing. “We take freedom of the individual, or perhaps the family, as our ultimate goal in judging social arrangements,” he writes.29 Freedom to live where one wants, travel where one wants, take a job of one’s own choosing, and explore what one wants is at the core of Friedman’s offerings. And he ties such liberties directly to free markets and capitalism.
Because we live in a largely free society, we tend to forget how limited is the span of time and part of the global for which there has ever been anything like political freedom: the typical state of mankind is tyranny, servitude, and misery. The nineteenth century and early twentieth century stand out as striking exceptions to the general trend of historical development. Political freedom in this instance clearly came along with the free market and development of capitalist institutions.30
Throughout Friedman’s writing, we can see a general distrust for the concentration of power within any institution, which, he believes, results in reduced freedoms for individuals in a society. “Our mind tells us, and history confirms, that the great threat to freedom is the concentration of power,” Friedman explains.31 As the ideological battle of his time was capitalism versus communism, Friedman focused on the ills of concentrating power in the hands of the state , but we should also now be thinking about how the concentration of power within fewer and fewer individuals and corporations will reduce our individual freedoms.”32
Adam Smith could not have envisioned the incredible, global expansion of multinational corporations. (He gave faint attention to public corporations in The Wealth of Nations, but only to express his belief that public corporations would be worse managed than private companies, given that ownership and management were separate.) Fast-forward some two hundred years: Public corporations have arguably overtaken the nation-state in power,33 and in the time since Friedman’s death in 2006, the likes of Amazon have expanded rapidly on the global stage.
Parting Reflection: Efficiency-Equality-Sustainability
In this chapter, we have considered a suite of three questions designed to assess whether a nation can be characterized as capitalist or communist. Capitalistic nations are called market-based economies or market economies because of their fundamental reliance upon markets to set the prices and quantities of goods and services in the economy according to supply and demand. A market economy has a tendency to naturally balance itself and is thus considered efficient.
The United States is not the only place in the world to embrace the ideals of capitalism. Many nations embrace a market-based economy. Most nations can be described as “mixed” economies, since in practice “pure” capitalism does not exist. In the next chapter, we’ll consider the experiences of two varieties of capitalism: US and Nordic. Whereas US capitalism has demonstrated attention to efficiency, the Nordic variety, put in practice during the twentieth century, has demonstrated a unique capability to achieve heightened levels of efficiency, greater equality, and comparatively stronger performances in sustainability. This demands successful negotiations of potential tensions between efficiency and equity, and sustainability plays a prominent role as we consider a comparison between US and Nordic capitalism.
1Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 2009).
2 Marx and others of his era—capitalism lovers or capitalism critics, like Marx—most certainly could not have envisioned a modern era where, rather than factories, finance and technology companies would represent some of the highest-valued businesses and where citizens’ personal data would be one of the most valuable capital assets a company could possess
3I know, I know—my “curves” are lines. But lines are really just straight curves, so think about that for a moment. And they’re easier to draw.
4A butter factory is called a creamery. I know this because I am from Wisconsin so if you would like to discuss the ins and outs of the production of butter or any associated dairy terminology, I am here for you. And yes, a cheesehead did likely save a man’s life. https://www.chicagotribune.com/news/ct-xpm-1995-11-28-9511290005-story.html
5 Friedman, Milton. “Economists and economic policy.” Economic Inquiry 24, no. 1 (1986): 1-10.
9For those of you asking, “What’s the deal with socialism?,” we’ll discuss that in detail in the next chapter. The terms “socialism” and “socialist” are deployed so inconsistently in an American context that they merit focused treatment. This chapter is limited to a discussion of capitalism vis-à-vis communism.
10Anne Applebaum, How Stalin Hid Ukraine’s Famine From the World, The Atlantic, 17 October, 2017, https://www.theatlantic.com/international/archive/2017/10/red-famine-anne-applebaum-ukraine-soviet-union/542610/
11Acemoglu, D., & Robinson, J. A. (2013). Why nations fail: The origins of power, prosperity, and poverty. Crown Books. (pp.127-128).
12 Acemoglu & Robinson (2013)
16 NASA/Reuters photo, 2015, https://www.businessinsider.com/north-korea-is-pitch-black-at-night-2015-10.
17 Daniel H. Pink, Drive: The Surprising Truth About What Motivates Us (New York: Penguin, 2011).
18I came to learn that if my manufacturing plans were rigid, then I would be more likely to push unnecessary work to the manufacturing floor. This was called worked in progress (WIP) and as it would flow through the manufacturing processes and ultimately become finished goods area we would come to realize that the shelves of finished goods inventory would be filled with unnecessary products. , and this would ripple back up onto the factory floor, as WIP shelves throughout the factory would fill, given that there was not actual demand for the finished goods like I had planned some time before. As WIP accumulated, the laborers could see that they were working on products for which there was no demand. (Remember that earlier graphic with the supply-and-demand curves? Reduced demand means the Demand curve shifts to the left, which results in a smaller production quantity.) Any sense of pride a worker might have had in creating a quality product would erode, because it’s hard to be proud of working on things that no one needs and that are just going to pile up on that shelf over there. This scenario also greatly increased the likelihood of product defects because of the basic fact that the WIP would not move to the next step in the process for a week or a month, so an inspector down the line might not realize a problem until it was far too late.
19 Agriculture has been referred to as “the old nemesis of socialist planners” for this reason. North, Gary. Marx’s religion of revolution: the doctrine of creative destruction. Craig Press, 1968. p. 224.
20“Japan’s Oldest Companies,” Yonhap News, May 15, 2008, accessed May 19, 2019, https://en.wikipedia.org/wiki/List_of_oldest_companies.
21Lynn A. Stout, The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public (San Francisco: Berrett-Koehler Publishers, 2012).
27Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1962), 20.
28 Ibid., 8.
29 Ibid., 12.
30 Ibid., 9–10.
31 Ibid., 2.
32 In the preface of Capitalism and Freedom, Friedman wrote, “The change in the climate of opinion was produced by experience, not by theory or philosophy. Russia and China, once the great hopes of intellectual classes, had clearly gone sour.”
33 When we consider the gross domestic product (GDP) of nation-states versus the annual revenues of public corporations, by the year 2000, of the largest one hundred economies in the world, fifty-one were publicly traded corporations, write Sarah Anderson and John Cavanaugh in “Top 200: The Rise of Global Corporate Power,” Corporate Watch, 2000. By 2015, sixty-eight of the largest one hundred economies were publicly traded corporations and one public corporation broke into the overall top ten economies: Walmart. Die-hard economists out there may wince at this comparison of GDP to annual corporate revenues, as it’s a bit of a mixed bag, but the overall trend that publicly traded corporations are increasingly powerful is undeniable.
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