Why The World's Dumbest Idea Is (Finally) Dying … Bad ideas don't die just because they are bad. They hang around until a consensus forms around another idea that is better. This is what's happening now with a stupid idea has dominated American business for the last four decades: that the purpose of a firm is to maximize shareholder value. The massive problems that this notion has caused for business and society have been documented. Even Jack Welch has called it "the dumbest idea in the world." Yet it remains the conventional wisdom throughout much of big business. What's different now is that a consensus is forming around a better idea. That's the big news coming out of a recent report from the Aspen Institute which convened a cross-section of business thought leaders, including both executives and academics. The report's most important finding is that majority of the thought leaders who participated in the study, particularly corporate executives, agreed that "the primary purpose of the corporation is to serve customers' interests." – Forbes
Dominant Social Theme: Building shareholder value is a terrific idea.
Free-Market Analysis: Milton Friedman is for the most part considered a great man by free-marketers. But when one looks at his work dispassionately several questions arise.
How could someone so motivated to enhance marketplace freedom come up with the idea of "income-tax withholding" and help implement it, as he did during FDR's wartime administration?
And how could such a free-market maven come up with the idea of a "steady state Fed" – a suggestion that central banks simply print regular amounts of monopoly fiat money without additional oversight?
This Forbes article reveals criticism of yet another Friedmanite insight – the idea that the corporation ought to be primarily focused on creating "shareholder value."
Here's more from Forbes:
"Creating value for all stakeholders" is the idea that preceded shareholder value. It was Milton Friedman who in 1970 argued that corporations had lost their way by addressing the needs of multiple stakeholders—shareholders, employees, customers and the community.
… Firms had to decide, Friedman said, on what their primary goal was. He proposed focusing solely on profit. He attacked those who thought differently as "unwitting puppets" of forces that were undermining society, and "stealing the shareholders' money" (along with other unprofessorial invective). The article drew on the ideology of those who believe that unconstrained pursuit of self-interest is always good.
However the choices are not between focusing on profit (a bad idea) or addressing multiple stakeholders (a discredited idea). The intelligent choice is the goal supported by the majority of the study's participants, namely, to serve customers' interests. This is essentially the idea that Peter Drucker articulated back in 1973: "the only valid purpose of a firm is to create a customer."
The goal was further articulated by Roger Martin in January 2010 in Harvard Business Review as "the age of customer capitalism." Maximizing shareholder value, Martin wrote, "is a tragically flawed premise, and it is time we abandoned it and made the shift to… customer-driven capitalism." Now in 2014, the Aspen Institute report shows that thought leaders are in fact converging on customer capitalism as a better idea.
Now, we know this is a powerful article because of the nomenclature involved: "Customer Capitalism." When someone has come up with such a powerful phrase along with equally powerful debunking logic, we are likely in the presence of an expanding dominant social theme. It helps that Aspen, Hillary Clinton's favorite think tank, is involved.
The government media these days is constantly singing the praises of official activism of all kinds. The idea of a "universal living wage," for instance, is being propagated along with economist Thomas Piketty's egalitarian claptrap. Here's what we wrote regarding Piketty:
Regarding Piketty's proposals, we offered the following:
… Court historians, journalists and economists work to obscure the real issues – central banking and judicially enforced corporatism among others – so that the problems that ARE attacked will never jeopardize elite control. So many faux solutions are being floated that we have difficulty keeping track of them.
There are Keynesian solutions and monetarist solutions, various central-banking solutions, digital solutions like bitcoin and, of course, the more recent elite promotions focused on "people's" central banking and "debt-free money."
Enter Piketty. HIS epiphany, we are supposed to believe, has to do with the discovery that wealthy people don't adequately distribute their funds to poorer folk. Hell, we could have told Piketty this and saved him a lot of research.
Notice, above, we referred to "judicially enforced corporatism." This was one of our main criticisms. He begins with the idea that the current system is marketplace oriented, yet in many ways it is not. He thus puts himself into a position of providing a "solution" to a false paradigm.
We've long identified two areas of change when it comes to marketplace economics. First, money needs to be divorced from monopoly/mercantilist central banking. Second, judicially enforced corporate personhood has to be expunged. Not surprisingly, this Forbes article misses this second point.
The article is well written, even passionate, but trying to realign modern corporations so that they emphasize the "consumer" rather than the bottom line is a bit like rearranging deck chairs on the Titanic. These solutions are not viable because the system itself is built on force. It is purely judicial force – the force of corporate personhood – that has created these massive corporations in the first place.
In Switzerland, where private banking is under attack, banks are switching over from partnerships – where partners are directly liable for business difficulties – to corporate personhood models. This is further confirmation of our perspective: When one is in danger of purveying abusive business practices, the corporate model is a good deal "safer" than a partnership.
We have no doubt over the next few years we shall hear and read a good deal more about "consumer capitalism." But without removing the basic construct of modern corporatism – state power that forcibly severs individual responsibility from corporate culpability – nothing much is going to change when it comes to Western capitalism.
The judicially enforced corporate construct is a big building block of the modern state. It has encouraged the current bloated corporate multinationalism and cultivated corporate bigness that works hand-in-hand with Leviathan itself. The result is likely a good deal closer to fascism than most pundits are comfortable acknowledging.
Corporate capitalism is a great idea. But corporations have to actually be subject to marketplace forces first. This is one reason – among many – that entrepreneurial startups (if handled properly) can be a good deal more sympathetic and promising than the alternative.
People aren't used to thinking of corporations as artificially created entities that ought to be stripped of their artificial judicial privileges. But the Founding Fathers were well aware of corporate abuses and Thomas Jefferson in particular was determined that corporate malpractice not prevail in the new union.
Ultimately, after the Civil War, much changed in the US and toward the turn of the century, the US Supreme Court redefined corporate personhood in ways that Jefferson and others had feared.
One can try to reform the US business model. But probably one needs to readdress – and remove – the fundamental judicial force that has created the modern corporation.