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 power management company with over $16 billion in revenue), says it well:
In a period of time when so many questions and doubts have emerged about major institutions in society, business has not done a particularly good job of telling its own story—not in the form of puffery, but really trying to help people understand the role of capital formation, how important it is to providing livelihoods for families, what business does for communities and for institutions like our schools and universities, and the role business has in helping solve so many societal problems. That is not the way so many people today think about business; they think of it as the source of societal problems. The great majority of companies are involved in doing pretty exciting work where people are having vital, exciting careers, earning a livelihood for their families and making a difference for their communities. That’s a story that is worth telling.17
Far from being a necessary evil (as it is often portrayed), free-enterprise capitalism is an extraordinarily powerful system for eliciting, harnessing, and multiplying human ingenuity and industry to create value for others. It must be defended not just on the basis of the profits it generates but also on the basis of its fundamental morality. Free-enterprise capitalism must be grounded in an ethical system based on value creation for all stakeholders. Money is one measure of value, but it is certainly not the only measure.
Marc Gafni is the cofounder and director of the Center for World Spirituality. Honoring the tremendous impact of capitalism and business on human well-being, he says:
Capitalism has lifted more people out of poverty than any other force in history, and it has done so through voluntary exchange. Communism tried to lift people out of poverty through coercion, but wound up killing countless millions. What does it mean to lift people out of poverty? It means babies not dying, it means mouths being fed, it means girls going to school and getting educated, it means a response to slavery that never existed in the world before. It means that all the values of the great (spiritual) traditions get enacted on two levels: by ending the physical oppression of poverty, and by opening a gateway for human beings to be able to grow emotionally, morally, spiritually, and socially.
Lifting people out of poverty was never the conscious intention of business; it was the by-product of a business well-enacted. Now business is awakening to itself and becoming conscious. It is recognizing that it is a force with enormous power and responsibility. By becoming conscious, it can do what it does even better. It can create more community, more mutuality, and paradoxically, more profit, by engaging everyone in the system.18
Correcting the Narrative
In a way, the practitioners of capitalism created their own trap and fell into it. They accepted as fact a narrow conceptualization of business and then proceeded to practice it in that way, creating a self-fulfilling prophecy. Had they rejected the caricaturized version and embraced a richer, more complex definition of capitalism, this would not have happened. As pioneering stakeholder theorist Ed Freeman and his colleagues write: “Business is not about making as much money as possible. It is about creating value for stakeholders. It is important to say this and to enable businesspeople to enact the story. We need to hold up the numerous companies, large and small, that are out there trying to do the right thing for the stakeholders, as the real paradigm of business, rather than deeply flawed companies like Enron.”19
We need to discover anew what makes free-enterprise capitalism what it has been: the most powerful creative system of social cooperation and human progress ever conceived. We next need to rethink why and how we engage in business to better reflect where we are in the human journey and the state of the world we live in today. We need a richer and more ethically compelling narrative to demonstrate to a skeptical world the truth, beauty, goodness, and heroism of free-enterprise capitalism, rather than continuing to harp on the tired maxims of self-interest and profit maximization. Otherwise, we risk the continued growth of increasingly coercive governments, the corruption of enterprises through crony capitalism, and the consequential loss of both our freedom and our prosperity.
Those who recognize and embrace the life-affirming power of free-enterprise capitalism must reclaim the intellectual and moral high ground. Gafni is eloquent on the need for a new narrative for capitalism:
