Stop the war on Capitalism

As a follower of current events, politics, government policy and the economy, I have concluded that there is a war on capitalism in America.  While the Administration talks of job creation, the tax code, business regulations and the desire to redistribute wealth tell a different story.

In a recent article from the Harvard Business School titled "A Manager's Moral Obligation to Preserve Capitalism" published in the July 29, 2013 edition of Working Knowledge, authors Rebecca M. Henderson and Karthik Ramanna make several interesting points as they argue that company managers have a moral obligation to preserve capitalism.

From Professor Ramanna we learn that "capitalism earns its legitimacy through the idea that the pursuit of self-interest explicitly delivers on certain moral goods for society. Individuals could criticize that moral framework—a Marxist, for instance, might argue that capitalism ignores issues of fairness in outcomes—but they can't say that it doesn't exist."

It is this idea of  "fairness in outcomes" that the current Administration espouses.  Those who oppose this idea believe that the way to equalize outcomes to to improve the low end of the economic ladder not bring down the top.

As the article states, "Capitalism's moral logic was perhaps most famously articulated by free market champion Milton Friedman when he said that 'the social responsibility of business…is to increase its profits.' That sentiment puts faith in the market to distribute wealth in the freest, fairest and most efficient way possible—indeed, Friedman went further to say that any attempt to curb the free market was harmful to the good of society."

And by the way, to distribute wealth, wealth must first be created.  Without private sector profit, there is no wealth to distribute.  It takes private sector business people to create wealth through capitalism.  As Margaret put it so well, "The problem with socialism is that you eventually run out of other peoples' money".

In a new working paper, "Managers and Market Capitalism", co-written by Henderson and Ramanna, they agree with Friedman's moral framework—but only when certain conditions are met. In their view, capitalism has two powerful things going for it. First, it has been shown to be incredibly effective in leading to economic growth. Ramanna observes, "If you look around the world, capitalism has lifted hundreds of millions of people out of poverty where previously deployed systems did not."

Second, capitalism tends to be self-correcting. When the free market does fail, the market itself steps in to correct the problem. For example, where a certain company dominates a market to create a near monopoly, entrepreneurs can find competitive advantages to create new opportunities. "Markets make markets work," says Ramanna. "That is the good news about capitalism."

But that doesn't mean markets always work to self-correct structural problems. As Adam Smith first identified in The Wealth of Nations (first published in 1776), free markets require certain conditions in order to function—among them, well-defined property rights, enforceable contracts, non-collusion between parties, and knowledge that puts everyone on a level playing field. And while some of these conditions are self-fulfilling in markets, some are not.

So some public or government intervention is viewed as necessary—and that intervention manifests itself as institutions that operate not through a competitive market process, but through a democratic political process.

Once the market is open to politics, then that market can be corrupted. Some have referred to this new problem as "crony capitalism".   Ramanna asks "if the knowledge is so esoteric that it only resides in a few individuals and those individuals engage in a political process that structures institutions that underlie capitalism, what are (their) obligations?"


The traditional free-market answer to that question is that their obligation is to increase profits for your shareholders, period. But what if that means, for example, undermining accounting standards in order to achieve short-term gains (remember Enron)?


Henderson and Ramanna argue that managers have another interest, not just to serve as agents for their shareholders, but also to serve as agents for the system as a whole. It is not in the long-term interest of a society that deploys capitalism to allow its corporate managers to set up systems that distort the market—potentially leading to corporate scandals or an economic crash—and the undermining of capitalism itself.

 Rather, in these political processes where self-interest can undermine the integrity of capitalism, a manager's moral obligation is put aside his or her own self-interest in order to preserve the interests of the system as a whole.


Of course, that's not an easy sell to someone in a highly competitive market trained to exploit every advantage. This is where norm-setting becomes important, the authors say. Ramanna points to norms that have shifted in the history of capitalism that were not necessarily in a company's self-interest. "We have been able to shift the moral boundary of self-interested corporate behavior when it comes to employing child labor and indentured labor," he says. "Part of this norm-shifting was done by carefully laying out the evidence and then building a strong logical case for what is consistent with the ethical imperatives that legitimize capitalism."

CEOs are usually not immoral people. So the next step in that goal, says Ramanna, is to determine what institutions might be necessary to shift the ethical consensus. He and Henderson have begun to look at increased disclosure on corporate accountability—particularly as it relates to lobbying—as one possible way to fill the information gap. Further, some industry groups have begun to push a concept called "ethical lobbying," in which they take on only clients that agree to broaden their focus to consider systemic interests beyond self-interest, a trend that Ramanna and Henderson think has potential to help change the prevailing mindset.

"Ethical norms don't shift in an instant; these are the kinds of shifts that take place over a generation," says Ramanna. "But if enough CEOs and lobbyists get together and say there is something not quite right about what we are doing, then we may be able to start changing norms."


This seems a far better way to approach the issue of achieving a narrowing of economic disparity  instead of more Government intervention and regulation.  I have observed that when such intervention and regulation don't have the desired results (an all to frequent occurrence), and too often create unintended consequences, the answer is more intervention and regulation, exacerbating the problem. The result - the current Administration's war on capitalism.

For the full text of the article click here

Workplace Motivation

In motivating your workforce, social comparisons can be more important than financial incentives. Research by Assistant Professor Ian Larkin of the Harvard Business School, suggests that the most powerful workplace motivator is not financial reward. Key findings of his work include:

• The most powerful workplace motivator is our natural tendency to measure our own performance against the performance of others.
• In the age of social networking, employees are more likely than ever to share salary information with each other. Employers need to keep this fact in mind when designing compensation plans.

"Traditionally, [the field of] economics has held a very rational view of people, and there's a gigantic amount of literature focusing on financial incentives and the idea that simply having financial incentives causes people to work harder," Professor Larkin says. "But my research suggests that in deciding how hard we work and how well we think we're performing, social comparisons matter just as much."

Salaries are getting less and less secret because of social networking. So when it comes to compensation, employers should assume there are no secrets. Larkin points out that "people get upset quickly when they realize that there are large variances in how much other people are paid. Companies need to realize that with the overflow of information these days, paying peers differently is going to affect not only how those people feel but how their colleagues feel as well."

Larkin goes on to argue that paying each employee solely according to his or her performance is actually an inefficient strategy; and it can lead to resentment or even sabotage on the part of employees who believe they are underpaid compared with their colleagues. Thus, a standardized salary scale, combined with non financial incentive programs, may be the best way to motivate employees. "When deciding how much effort to exude, workers not only respond to their own compensation, but also respond to pay relative to their peers as they socially compare." 

Click here for the complete article as published in "Working Knowledge"

Moving the Cheese

You have probably read or at least heard of the business classic "Who Moved My Cheese?" by Spencer Johnson. By way of review, Johnson's characters include mice in a maze, and teaches lessons about accepting and anticipating change gracefully.

Now, Deepak Malhotra, a professor in the Negotiation, Organizations and Markets unit at The Harvard Business School asks, "Is that really the best message to send to your employees?"

In his book, "I Moved Your Cheese" he argues that success in the areas of innovation, entrepreneurship, creativity, leadership, and business growth—as well as personal growth—depend on the ability to push the boundaries, reshape the environment, and play by a different set of rules.

He believes that "in some ways, the message of WMMC may indeed be dangerous, or at least debilitating, because it promotes the idea that change is inevitably beyond our control, that we shouldn't waste our time wondering why things are the way they are, and that we should just put our heads down and keep running around the maze chasing after cheese."

He goes on to say that "what is often holding us back from achieving greater success is not real limitations, but that we have internalized environmental pressures, social norms, and the expectations of other people. The world tells us how things have to be, and we don't push back enough."

Click here to learn more from the full article that appeared in the September 2011 addition of "Working Knowledge" published by the Harvard Business School.

Is Web Surfing Distracting Your Workers?

The Internet brings powerful tools to the workplace. It also brings powerful distractions - face book, personal shopping, games, videos, music or just surfing.

A number of studies have suggested that US workers waste between one and two hours a day web surfing, costing their companies billions in lost productivity. In response, some employers have banned private Internet use at the office. Sounds like a good idea on the surface. But this practice can result in other problems, perhaps more serious problems, according to new research.

The research paper "Temptation at Work", by Harvard Business School research fellow Marco Piovesan and colleagues, is believed to be the first study of the effects of temptation on work performance. The paper suggests that by banning web surfing, employers are essentially asking their workers to resist temptation until they can go home and surf on their own time. Yet people who are asked to resist temptation in anticipation of a later reward spend effort and energy resisting the temptation and actually become less productive and make more mistakes.

This conclusion is based upon laboratory tests on young people. These tests suggest to Piovesan that instead of a blanket policy prohibiting web use, employers should give workers periodic breaks for "personal communications". These frequent breaks, it is believed,would increase employee energy and relax them so their willpower comes back to the original level.

"They could go out for five minutes and check e-mail and still be able to concentrate on their jobs." In the future, Piovesan hopes to test that principle in an actual office environment. So stay tuned.

Click here for the link the the full article.