Stakeholder Capitalism And Why It Is Dangerous?

What is Stakeholder Capitalism and Why is it Dangerous?

Stakeholder Capitalism is one of those ideas that works great on a t-shirt and makes people feel more clever than they actually are.

Stakeholder Capitalism is the theory that firms should be accountable to their stakeholders instead of their shareholders. Meaning, instead of serving their owners and being accountable to their owners, they should cater to the desires of the nebulous “society.”

In this post, I’ll try to break down the problems with the concepts of Stakeholder Capitalism, explain what it really is, and why it would have disastrous consequences.

The reality is, it’s just another collectivist idea that makes some people feel warm and fuzzy.

We should be worried because this concept is being pushed at the highest levels of world governments.

One of the reasons it’s a stupid idea is for the same reason that design by committee is a stupid idea. Here’s a comic that explains it:

The problem is that everyone has different needs, capabilities, desires, understandings, etc. We, humans, are all different and it’s not just really hard to try and satisfy all the stakeholders, it’s impossible.

Centralized vs Decentralized

Humans are incredibly good at solving huge problems in a decentralized way, through organic networks of interworking systems. Conversely, we are absolutely terrible at solving even the simplest societal problems when we centralize power.

This is because what makes these sorts of problems difficult in the first place is not due to lack of effort or resources, but lack of knowledge. Decentralized systems are able to quickly experiment and adapt, independently working to solve the same problem using their own unique skillsets.

Centralized systems are rigid and change very slowly, but can force action. They are like a huge ship that turns very slowly and is tough to get started. But once it’s moving, there’s nothing better at transporting tons of goods.

Centralized systems are slow to turn because they must be highly structured to function. The leadership wields tons of control over the system to be able to realize their vision.

An example of a very effective centralized system would be Apple under Steve Jobs (effective, not perfect). Steve Jobs was able to organize the efforts of everyone around him and give them a clear vision of what they were shooting for. Thus, he drove the creation of revolutionary products.

Creating great products is a relatively simple problem when stacked up against societal problems like inequality, ocean acidification, and prejudice.

These are far more difficult and require a far different approach. Using a centralized system powerful enough to attempt these problems is always hugely destructive because it cannot course-correct when it makes mistakes — it just keeps plowing forward until society itself shatters.

“It is far easier to concentrate power than to concentrate knowledge. That is why so much social engineering backfires and why so many despots have led their countries into disasters.”

THOMAS SOWELL, INTELLECTUALS AND SOCIETY

One company, government, or other centralized structure is hopeless to solve the greatest problems of society. They will instead push forward and create great suffering in the name of progress. Society can only be changed from the ground up and trying to force your ideology’s ideal society only breeds resentment, or worse.

Why Companies Under Stakeholder Capitalism Can’t Fix Society

When you own a company, it damn well better be doing things that you like. If you own more of a company, your voice should be even louder.

That’s why centralized systems get things done quickly (for better or worse). The singular voice ensures consistency and aims everyone in the same direction.

When a company starts trying to cater to society-at-large, as is prescribed by Stakeholder Capitalism, it is doomed to fail.

Trying to do so perverts the incentives that exist in a shareholder-business relationship. Different stakeholders pull the business in all directions just like the tree-swing in the comic above. No longer can the business simply do what the owners want, it must do what all of society wants.

The business will be crucified for its inaction and at the same time punished for its actions. Gone are the days where they simply provided value to their customers. Because their bread supplier might be a bigot, the passersby might be insulted by their branding, and the government might think their business is a health risk.

There’s No Free Lunch

To break it down in a different way… If you buy yourself lunch, does the cook, cashier, and the guy sitting next to you deserve to have a bite? After all, they were stakeholders in the experience. The cook obviously made it, the cashier facilitated the transaction, and the guy sitting next to you has to smell it and see you eating it.

Of course not.

Now, say instead you buy 25% of that business where you had lunch. Stakeholder Capitalism says that your new business should consider the needs of its suppliers, passersby on the street, its creditors, the government, and the society-at-large.

Suddenly the ant is responsible for the whole anthill.

It’s difficult enough for businesses to even provide value to their customers, let alone the rest of society.

This is why a business’s only responsibility is to its shareholders — and shareholders may value other things more than profit (profit is the extra money after all expenses are paid).

A business brings profit to shareholders by efficiently providing value to its customers. If the business is not efficient, it wastes money and there is less profit. If the business doesn’t serve its customers, the customers stop patronizing the business and there is less profit.

The incentives are neatly aligned so that the more value a business brings to its customers, and the more efficiently it uses the world’s scarce resources, the more successful and profitable the business will be.

The Rise of Stakeholder Capitalism and the Merger of Corporation and State

The wrinkle in this system comes from the human element.

We’re not all rational creatures driven to maximize profits. Do you know how all the biggest companies in the world grew a conscience all of a sudden?

It seems the shareholders have let the power go to their heads or perhaps they’ve been steered awry by uninformed idealism.

When outdoors companies like Patagonia take a stance on issues related to national parks and preserving ecosystems, nobody bats an eye. That’s because it’s on-brand, on-message, and core to the company’s values.

You see, a rock-climbing environmentalist founded Patagonia. The shareholders are environmental activists and the company reflects that.

Equally so, when internet companies lobbied the public and the government in their early days, it was for the good of the internet, not fulfilling their grand vision of the ideal society.

However, it has become normal for companies to be politically active in the broadest sense. This is what happens when shareholders seek value outside of profit. Today’s shareholders are increasingly seeking social approval, power, and political favors and they’re using the businesses they own as the vehicle to achieve those desires.

Instead of on-brand activism, we’re seeing a new age where corporations at the highest level merge with the political establishment. They offer control over their customers in exchange for political.

We’re far beyond the revolving doors of yesteryear. In this new world, politics is business, and corporations are merged with the government. Private corporations have become public-private partnerships that collude with political actors to do things the government is forbidden from doing.

Stakeholder Capitalism: Yet Another Attempt to Engineer Society.

To attack the ideas of stakeholder capitalism is really to attack the concept of centralized control over society. No business is capable of following the concepts of stakeholder capitalism unless they’re sufficiently massive and powerful.

The societal impact of a local bakery is simply irrelevant in most peoples’ eyes. (Though I would argue that hard-working small businesses have a huge positive impact on society.)

So, let’s see if we can give the ideas of Stakeholder Capitalism a shallow grave, starting with another quote:

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

FRIEDRICH HAYEK

This is the resounding discovery of the 20th century.

The socialists in the Soviet Union and China claimed that their centralized planning would invigorate society and optimally distribute resources to the noblest causes.

They were wrong.

They pursued great (and terrible) works. Organized the labor under a singular cause and made great leaps in some ways. The problem is that each step forward created far greater damage beneath the surface.

The system came crashing down after enough damage and inefficiencies built up. People eventually gained the courage to stand up to the corruption, usually long after their homeland was permanently damaged.

This is the fate of any society where the powerful gain control of the economy and therefore the people. It was once kings and emperors that were the powerful. When the people seized control of their own liberty from the monarchies, humanity blossomed.

Liberty Built the World and Central Planning Destroyed It.

The only times in all of history where the living standards of the peasantry have risen consistently, have been the times they are free.

Liberty was a radical concept in Europe during the 1500s and early 1600s when monarchic states assumed total control over the peasants. It took countless bloody conflicts to wrestle that power away from the rulers, but it was worth it.

For the first time, the peasants owned themselves.

Over the next few hundred years, the people claimed more of their natural rights and finally set out to build a system that would protect them from the evils of the state.

They replaced monarchs with politicians.

The terrible irony is that the most selfish and heartless people rise to the top of politics.

And soon these people came to power.

This is another key reason why social engineering and centralized economic control ends in failure. The most selfish and power-hungry people are always the ones to bring about the utopian vision.

They only care about themselves and they don’t care who they hurt to get what they want. They also tend to think they’re much smarter and deserving than the rest of us. That’s why these “leaders” destroy their people and their countries.

And it only gets worse the more power they take.