Health Food Chain Owner and Academic Try to Save Capitalism

Conscious Capitalism: Liberating the Heroic Spirit of Business

By John Mackey and Raj Sisodia

(Harvard Business Review Press, Boston, 2013, 344 pages)

Is capitalism ethical, moral and does it benefit most human beings?

Yes, on all counts, according to this book. In general, the authors, an entrepreneur who founded Whole Foods (nee Safer Way) and an academic, a Bentley College marketing professor, answer those questions in the affirmative. Mackey seems an unusual proponent of capitalism. He is a 1960s counter-cultural vegan. But, in forming a food cooperative and later starting his own store in 1978 in Austin, Texas, his ideas about capitalism evolved. Going through the traumas of building a business, he discovered many of the works of the Austrian School of Economics, including F.A. Hayek and Ludwig von Mises. After recounting these experiences, he and his fellow author spend a good part of this book affirming the virtues of markets.

Capitalism, the authors aver, is noble “because it lifts people out of poverty and creates prosperity.” (page 22) Indeed, in Mackey’s first years as a capitalist he discovers that “business isn’t based on exploitation or coercion at all. Instead, I discovered that business is based on cooperation and voluntary exchange.” (page 3).

So the authors affirm what many market theorists have: In a market economy, people aren’t required to pay for obscene, useless programs—-such as needless wars, badly designed mandatory social insurance schemes, some of which are going broke, bridges to nowhere, government-run trains almost no one rides, etc—-under the guise of democracy. In business, the authors find something different, “Customers have competitive alternatives…” (page 3)

Yet despite their capitalist blessing, the authors have some caveats about markets. Executives at big financial firms are often overpaid, the authors assert. However, there is no mention of the entertainers and non-performing athletes who pull down what some would say are outrageous salaries. These are salaries that lead a former Bronxite and lifelong Yankee fan like me to pray that a bum like A-Roid will suddenly pull a Pope Benedict.

There are the varieties of capitalism, the authors contend. And they use this book as a platform to advocate for their system of capitalism. The authors argue for a morals-based capitalism, conscious capitalism. It is a capitalism they define in various ways.

But they also warn us to look out for a Brand X capitalist model. It is called crony capitalism. For the authors, the American financial sector is the best example of this phony capitalism. This is capitalism that is familiar to students of economic history. It is one in which faux entrepreneurs prosper not through their skills and marketplace triumphs, but owing to political favors bestowed by pols.

It’s an old story. It can go back at least to the France of Louis XV, who made a Scotsman called John Law the nation’s banker. Here was a kind of early central banking that blew up in 18th century France much the way it did in the United States in the 20th and 21st centuries. Here is a classic crony capitalism that the authors could have also dwelled on in illustrating. That’s when politics, not competition, rules an economy through central banks and phony business people who ingratiate themselves with the ruling Boss Tweeds. How did crony capitalism happen?

Crony capitalism, the authors say, is at least in part the result of big government. So increased “regulations and the size of scope of government have greatly expanded, creating the conditions for the spread of crony capitalism as well as restricting competition in favor of politically well-connected businesses. “Crony capitalism,” the authors explain, “is not capitalism at all, but is seen as such by many because it involves businesspeople.” (p16). Or, I would add, these are phony business people who not don’t want to live for consumers, but leech off the taxpayers.

Here the authors make an excellent point. It is one that could have been re-enforced by history and philosophy. From at least the time of Adam Smith, some observers of markets have noted certain capitalists spend less time working on their business and lots of time trying to put together cartels or baying for government favors that support them.

For instance, the work of left-wing historian Gabriel Kolko has established that big railroads in the 19th century, fearing competition from newer entrants, were that ones that pushed for the establishment of the Interstate Commerce Commission and anti-trust laws. (For more on this see Kolko’s “The Triumph of Conservatism.” Also see by the same author “Railroads and Regulations, 1877-1916.” Of the latter, see pages 8-10. Here Kolko goes through the various pooling arrangements among major railroads that broke down.)

The big boys feared raw capitalism, conscious or otherwise. They sought these laws to limit competition and fix rates, as well as new rules to prevent monopolies and keep themselves on top. This was their way to lessen the pesky competition of new entrants. And yet every time the big players tried to fix rates among themselves in order to keep out new players, the scheme always broke down whenever one railroad cheated, Kolko writes. Then everyone felt freed to compete again.

The authors of “Conscious Capitalism” seem to understand why competition is a very good thing. When allowed to function, it tends to provide high standards of living even though it is often a human desire not to want to compete. It is human nature, once one has achieved a degree of success or made it to the top of greasy pole, to think that one will always be at the top. Many executives of “top” businesses will kick back, turn on the ballgame and pop a beer while more energetic people are preparing to eat their lunch.

Indeed, I’ll bet someone right now is dreaming up an idea for a new health food store model that someday might trump Whole Foods and make it appear to be outdated as, say, A&P or IBM in the information technology sector.

(The authors of “Conscious Capitalism” make a point of noting how nutritious their foods are. However, this is a relative term. I believe the Seventh Day Adventist restaurants I have patronized—-the few I have been able to find,—have the most delicious meals and are far better for you than what one finds at Whole Foods, good as they are. The Seventh Day Adventist diet is no meat, no fish, and no dairy products, yet their foods are remarkably good. Maybe someone will come up with a national chain incorporating these principles and Whole Foods will suddenly seem like MacDonalds! )

I know this intuitively and through reading economic history. Yet the authors, in their current triumphs, sometimes write as though Whole Foods was the 1927 Yankees and had Babe Ruth in his prime playing on their team.

Indeed, the authors more than once crow about the merits of Whole Foods and its ability to beat the strongest competitors (See below). One reads these comments, which sometimes come across as the equivalent of high-spirited sophomores doing their college yells at a football game. At this point, I think maybe Mackey should have also read the Austrian economist Joseph Schumpeter.

Schumpeter was a legendary economist and polymath who wrote about how market forces brought about “creative destruction,” which constituted the search for improvement through relentless competition. (Anyone interested would enjoy Thomas McCraw’s recent Schumpeter biography “Prophet of Innovation.” And, of course, there is one of Schumpeter’s great works, “Capitalism, Socialism and Democracy.”)

The authors of “Conscious Capitalism” should be reminded that, in a market economy, all glory is fleeting, including theirs. They should be reminded of the time when IBM was so strong that the U.S. Justice Department launched an anti-trust lawsuit against it. This was a two decade old lawsuit that eventually fell apart because it was so ridiculous as are most anti-trust lawsuits and most anti-trust laws. Of course the idea that IBM today, or for the last 30 years, is and has been recently a dominant player that can overwhelm competitors and has too much market power is risible.

Yet that is precisely the kind of case the Justice Department was making when it filed suit in 1969. (After more than six years in court and a trial transcript of more than 104,000 pages, the case was abandoned by the government in 1982.” From page 2 of “Antitrust Policy. The Case for Repeal,” by D.T. Armentano (Cato Institute, Washington, D.C., 1986).

(By the way, I remember IBM, at its peak, as engaging in a form conscious capitalism, although no one used that phrase back in the 1960s. IBM had some of the best benefits programs for workers and for years it didn’t lay people off even in bad times.)

The authors of “Conscious Capitalism” should also remember when, many years ago, A&P was a supermarket chain that many people complained was too powerful. Or they should remember when economist John Kenneth Galbraith contended the power of these big corporations was so great that they could never be humbled. For that analysis and his facile writing style, he was the toast of many intellectuals, even though he was wrong about so many things (He praised the Soviet economy right up until it imploded. He also predicted that the German Federal Republic’s decision to take off price controls would never work. Yet it was one of the factors in creating the German economic miracle of the 1940s and 1950s).

Galbraith regularly complained about the supposed overwhelming market power of big corporations. It was a power, he claimed, that allowed corporations; through economies of scale and advertising to virtually dictate to the consumer (One of those cited was GM! It went bust recently). (See Galbraith’s 1967 “New Industrial State,” pp29-30, in which he argues that large corporations can dictate to the market. This, he says, allows corporations “to set prices for automobiles, diesels, trucks, refrigerators and the rest of its offering and be secure in the knowledge that no individual buyer, by withdrawing its custom, can force a change.”)

Nevertheless, the authors of “Conscious Capitalism” at times capture the essence of what capitalism is. It is cooperation between various parties, often parties that in other circumstances that could be at odds, to achieve common ends. Almost everyone wants to turn a buck sometime in a life and what’s wrong with that? It is this cooperation that has elevated the standard of living of billions of human beings and the authors certainly grasp that central point.

So, despite some minor complaints, the authors of this interesting book, who want businesses to be more socially conscious, are to be commended. They recognize one basic fact that many business critics seem to miss: It all begins with profits. In the early part of the 20th century carmaker Henry Ford—a brilliant industrialist through much of his career and a notorious anti-Semite—was praised for giving his auto workers high salaries.

Why?

He wanted them to be able to afford to buy the products they made. However, that could only happen because he had a booming business.

Ergo, businesses can’t be generous, can’t give back to the community and practice a higher form of business called conscious capitalism unless they are healthy and growing. But although the authors say businesses practicing conscious capitalism don’t have to do much more than be well run, they recommend four supporting ideas: higher purpose, stakeholder integration, conscious culture and management.

“Conscious capitalism,” they write, “is not about being virtuous or doing well by doing good. It is a way of thinking about business that is more conscious of its higher purposes, its impacts on the world, and the relationships it has with various constituencies and stakeholders. It reflects a deeper consciousness about why businesses exist and how they can create value.” (pp 32-33).

At this point my brain is spinning faster than some guy rolling in the mud at Woodstock in 1969. A deeper consciousness? Deeper than what?

The reader isn’t sure because the authors aren’t clear, other than saying they want to be sure that they are conscious—an overused word that was driving me batty by the end of the book—of the contributions of every part of their business, from the people who ante up the money, to the people who work for Whole Foods, to the customers who are regarded as “friends” and the suppliers, etc. Conscious capitalism appreciates them all, the authors explain. That’s because “they represent the essential elements of an integrated business philosophy that must be understood holistically to be effectively manifested.” (And please don’t ask what “effectively manifested” means because I don’t know either.)

Effectively manifested?

Here again, the language becomes cloudy, One wonders how far the authors actually want businesses to assume responsibility for society. Just turning a profit is difficult enough these days for many businesses. But conscious capitalism, despite comments to the contrary by the authors, seems to demand much more.

But the book, besides some clumsy writing, also has some issues in which the authors’ version of social cooperation can drift into social engineering. Indeed, the authors sometimes seem to think the purpose of Whole Foods is not only to give Americans what they may want today, but to re-educate them to their version of healthy foods.

“The challenging art of our business is to educate customers to want what’s good for them, but at the same time to give them the freedom to still choose the products they want even if the choices aren’t good for them.” (page 78).

And what is good for them? And who decides? And do we want a group of Platonic guardians who unilaterally act to save us from ourselves? I wonder what Mackey and company think of Mayor Bloomberg, the little nanny leader of the Big Apple who wants to crack down on those dietary habits that he deems unhealthy? (I wonder if the mayor drinks coffee? I, and many other people, think caffeine is very bad, but we’re not trying to pass laws to stop people from consuming it. That would be arrogant.)

Let me stipulate that sometimes my wife and I patronize Whole Foods. It is a good food chain, but it certainly has its faults (There have been times when I visited the Chelsea store in Manhattan when I couldn’t get a dessert because too many of them had sugar and a few had the chemicals that my wife, the ever comely Suzanne Hall, and I abhor).

Indeed, I know a lot of health food store owners who think Whole Foods has more than a fair amount of junk. For instance, I find sugars in many of their delicious desserts while the Seventh Day Adventists would instead use a sweetener like carob. (Seventh Day Adventists have a diet that would put Mackey’s to shame—-no meat, no fish or diary products. I’m sure they could look down at Mackey’s and say he has a junky diet he needs to be “educated.”)

Still, the authors say, “If we do our job well, over time customers will choose differently.” (p 78)

Really?

That implies that conscious capitalism can and should be able to change tastes. Now we’re back to Bloomberg and the rest of the social engineering crowd who insist that they know better than the rest of us how we should run our lives. The engineers apparently view us a herd of human blanks when we chow down. However, how do we know that the diets of Mackay and company are perfect, even for them no less for other people?

This kind of imperious thinking reminds me of the pol who preaches the virtues of public transit and public schools, then arrives at a meeting by private car after packing off his ninos to some high-priced private academy. The authors of “Conscious Capitalism” should remember one of the simple truths of capitalism as detailed by Ludwig von Mises in his masterwork “Human Action.”

Capitalism, Mises says, is a customer driven system. (Writes Mises, in words every market player forgets at his or her risk, “In his capacity as a businessman a man is a servant of consumers, bound to comply with their wishes. He cannot indulge in his own whims and fancies. But his customers’ whims and fancies are for him ultimate law, provided these customers are ready to pay for them.” P 240, “Human Action,” (FEE, Irvington-on-Hudson, New York, 1963)

Amen, brother!

So, in closing let me provide an addendum to the principles of capitalism and state its good point and its bad point: The good point is: It allows the consumer to make his or her own choices.

And now, allowing me to cut and paste, here is its bad point: It allows the consumer to make his or her own choices.

No, I haven’t been drinking. Capitalism’s good and bad points are often the same. That’s the way economic freedom is. It is at once exhilarating and maddening. But like a beloved spouse, the bad goes with the good.

The authors, no matter how much they want to whoop it up for their view of capitalism, must accept and learn to live with a dynamic system often populated by finicky players called consumers. They are often like many of the ill-humored judges on these cockamamy tube reality talent shows. Agree with these market judgments or not, whether they are enlightened or moronic—depending on one’s point of view, which over a lifetime usually changes—these judgments determine the winners and losers. (Economist John Maynard Keynes, who was reputed to be able to change his position very easily, is supposed to have said to a critic: “When the facts change, I change my position. What do you do?” )

Although Whole Foods is, in many ways an improvement over many previous food chains, it is certainly not the best food store one can find today or likely tomorrow. And for that, we can thank a system of choice controlled by demanding customers, whose choices the authors sometimes disparage.

What is the system? It is a maddeningly competitive and successful process called capitalism.

 

The Financial Sector Is What’s Wrong with the American Economy:

 “In recent years, the financial sector has become increasingly profit obsessed and short-term oriented. Compensation levels have soared to ridiculous heights as financial incentives have fueled the fire toward immediate, profit-only management, diminishing the real value creation. Many banks started to trade on their own accounts in order to generate greater profits. This has led them into many well-documented risky ventures, while also compromising their integrity as financial advisers. No wonder the industry’s reputation is in tatters.” (p50)

Whole Foods, Authors Claim, Will Beat Walmart Time and Again:

 “If Whole Foods Market, for example, had to compete with Walmart strictly on the basis of supply chain efficiency or distribution economies of scale, it would be impossible for us to win. But what we can do is to be more nimble, more creative and more innovative and provide higher-quality service while creating a better store environment. By the time Walmart figures out what we are doing, we will have moved on to newer and better innovations that create new value for our ever-evolving customers.” (p80)

About The Author

Gregory Bresiger

Gregory Bresiger is an independent business journalist from Queens, New York. His Personal Finance articles have appeared in publications such as The New York Post & Financial Advisor Magazine. He is the author of the eBooks “Personal Finance For People Who Hate Personal Finance” and “MoneySense”.