Conscious Capitalism. John Mackey

for everyone. This idea is at the core of capitalism’s extraordinary and unique ability to generate wealth.

      The Unintended Consequences of Low-Consciousness Business

      When businesspeople operate with a low level of consciousness about the purpose and impact of business, they engage in trade-off thinking that creates many harmful, unintended consequences. Such businesses view their purpose as profit maximization and treat all participants in the system as means to that end. This approach may succeed in creating material prosperity in the short term, but the resultant price tag of long-term systemic problems is increasingly unacceptable and unaffordable. Too many businesses fail to recognize the significant impacts they have on the environment, on other creatures that inhabit the planet (such as wildlife and livestock animals), and on the physical health and psyches of team members and customers. Many businesses have created stressful and unfulfilling working conditions and fostered and fed unhealthy appetites and addictions in their customers. Many companies tend to treat all these as externalities, outside the scope of their own concerns.

      Symptoms of dysfunction and disaffection abound in the corporate world. The average level of engagement that American team members have with their work has remained at 30 percent or less for the past ten years, and almost as many people are hostile to their employers.¹³ Top executives at the helm of many major corporations have rigged the game to enrich themselves at the expense of the company and its stakeholders. While employee wages in the United States have been virtually stagnant for decades, executive pay has skyrocketed, fracturing workplace solidarity. According to the Institute for Policy Studies, the ratio between CEO pay and average pay was 42:1 in 1980, 107:1 in 1990, and 525:1 in 2000. It has fluctuated in recent years, standing at 325:1 in 2010.¹⁴

      Given all this, it is not surprising that the reputation of business has suffered. Corporations are widely seen as greedy, selfish, exploitative, and untrustworthy. Big business, in particular, has a terrible reputation today. Gallup has found that Americans’ confidence in big business has declined steadily, from about 34 percent in 1975 to a historic low of 16 percent in 2009, rebounding to 19 percent in 2011.¹⁵

      The Myth of Profit Maximization

      The persistent myth claiming that the ultimate purpose of business is always to maximize profits for the investors probably originated with the industrial revolution’s earliest economists. How did this myth originate? It appears to have come from two sources: a narrow view of human nature and an inadequate explanation of the causes of business success.

      Looking to create elegant mathematical models of economic systems, academic economists adopted the narrow view that we humans are maximizers of economic self-interest to the exclusion of all else. By logical extension, businesses, too, were deemed to be pure profit maximizers. These simplistic assumptions enabled economists to create models that seemed to explain some of the workings of the larger economy.

      The classical economists also formulated their theories by observing and describing the behavior of various entrepreneurs and their businesses. They observed correctly that successful businesses were always profitable and that, indeed, the entrepreneurs who organized and operated these successful businesses always sought to make profits. Businesses that were not profitable did not survive for long in a competitive marketplace, because profits are essential to the long-term survival and flourishing of all businesses. Without profits, entrepreneurs cannot make the necessary investments to replace their depreciating buildings and equipment or to adapt to the always-evolving and competitive marketplace. The need for profit is universal for all businesses in a healthy market economy.

      Unfortunately, early economists went far beyond merely describing how entrepreneurs always seek profits as an important goal, to concluding that maximizing profits is the only important goal of business. Taking it one step further, the economists soon asserted that maximizing profits is the only goal entrepreneurs should seek. The classical economists went from describing the behavior in which they observed successful entrepreneurs engage while operating their businesses, to prescribing the behavior as the correct one that all entrepreneurs should engage in all of the time. How did they come to this conclusion?

      In the United States, we often take for granted the availability of large pools of capital to invest in new businesses because our economy has been producing these pools for more than 250 years. However, at the beginning of the industrial revolution, capital was quite scarce. Successful enterprises accumulated profits, and entrepreneurs and investors redirected accumulated capital into promising new opportunities, at unprecedented levels. Not surprisingly, then, classical economists became enamored with the importance of profits, because profits had historically been rare and were essential to the continued progress of society.

      The principle of profit maximization even became codified into corporate law as the de facto definition of fiduciary responsibility. Economists and eventually business scholars integrated these ideas into their textbooks, shaping the thinking of virtually every student who pursued higher education thereafter. The enemies of capitalism used the ideas as powerful points of attack on the ethical basis of capitalism, to great effect.

      But with few exceptions, entrepreneurs who start successful businesses don’t do so to maximize profits. Of course, they want to make money, but that is not what drives most of them. They are inspired to do something that they believe needs doing. The heroic story of free-enterprise capitalism is one of entrepreneurs using their dreams and passion as fuel to create extraordinary value for customers, team members, suppliers, society, and investors.

      This is a very different narrative than the one that sees history through the lens of profit maximization. Bill Gates did not start Microsoft with the goal of becoming the richest man in the world. He saw the potential of computers to transform our lives and was on fire to create software that would make them so useful that eventually all of us would own one. He followed his passion and, in the process, became the richest man in the world—but that was the outcome, not his goal or purpose.

      The myth that profit maximization is the sole purpose of business has done enormous damage to the reputation of capitalism and the legitimacy of business in society. We need to recapture the narrative and restore it to its true essence: that the purpose of business is to improve our lives and to create value for stakeholders.

      The Cancer of Crony Capitalism

      True free-enterprise capitalism imposes strict accountability and strong internal discipline on businesses. For over a century, the U.S. economy demonstrated to the world that free-enterprise capitalism can deliver great benefits to all humankind. It created a large and prosperous middle class, belying the current inaccurate critique that free-enterprise capitalism necessarily concentrates wealth among a privileged few at the expense of everyone else.

      But as the size of government grew, a mutant variation of capitalism has also grown, spurred on by those unable to compete in the marketplace by creating genuine value and earning the affection and loyalty of stakeholders. Instead, they have thrived by using the power of government for their own enrichment. Crony capitalists and governments have become locked in an unholy embrace, elevating the narrow, self-serving interests of the few over the well-being of the many. They use the coercive power of government to secure advantages not enjoyed by others: regulations that favor them but hinder competitors, laws that prevent market entry, and government-sanctioned cartels.¹⁶

      While free-enterprise capitalism is inherently virtuous and vitally necessary for democracy and prosperity, crony capitalism is intrinsically unethical and poses a grave threat to our freedom and well-being. Unfortunately, our current system has the effect of corrupting many honorable businesspeople, pushing them into becoming reluctant crony capitalists as a matter of survival.

      Moving to Higher Ground

      This is what we know to be true: business is good because it creates value, it is ethical because it is based on voluntary exchange, it is noble because it can elevate our existence, and it is heroic because it lifts people out of poverty and creates prosperity. Free-enterprise capitalism is one of the most powerful ideas we humans have ever had. But we can aspire to even more. Let us not be afraid to climb higher.

      Sandy Cutler, the chairman and CEO of Eaton Corporation (a global