When corporate executives this past week decided to resign en masse from two highly visible White House advisory councils, it was not only another marker in Donald Trump’s fall into political and policy irrelevancy, although it was surely that.
More significantly, it is likely to be looked back upon as a turning point in the evolution of American capitalism — an acknowledgment from some of the nation’s top corporate executives that the single-minded focus on maximizing profits and share prices that has been their mantra for the past three decades is no longer politically viable or morally acceptable.
It is unlikely that any of smiling executives who posed for photographs with the president this spring at the first meeting of the White House Strategic and Policy Forum and the Manufacturing Jobs Initiative had been enthusiastic supporters of candidate Trump. Publicly, most had opposed the president’s positions on immigration, trade, climate change and gay rights. Privately, many thought him unsuited for the job.
Nonetheless, the president’s economic advisers had convinced the executives that they would be able to help shape the administration’s economic program. And the executives were eager to lend their support and legitimacy to administration efforts to boost their profits by lowering taxes and reducing regulation. The run-up in stock prices since the inauguration — the “Trump bump” — seemed to confirm that original calculation.
But two things have changed that cost-benefit analysis.
The first was that the president and Republican allies in Congress have made such a hash of things that businesses are unlikely to get tax reform or the regulatory relief that they imagined.
But the more surprising one was that Trump’s response to the protests and murderous violence by neo-Nazis and white supremacists in Charlottesville, Virginia, had been so offensive that, even if he were able to deliver for shareholders, customers and employees of these companies were no longer be willing to accept the moral compromise that went along with it.
In other words, it took Donald Trump to convince corporate leaders that maximizing profits for shareholders is not all that matters — that in the era of the internet and social media, other stakeholders have the power to force companies and their leaders to behave in ways that conform to social norms and are consistent with widely shared moral values.
The moral justification for “maximizing shareholder value” had always been a utilitarian one. It went something like this:
The magic of free markets is that, by allowing and encouraging producers, consumers and investors to act selfishly in ways that maximize their own income, the economy is led, as if by “an invisible hand,” in Adam Smith’s felicitous phrase, to a level of prosperity that makes everyone else in society better off.
This free-market system has lifted billions of people out of the subsistence poverty in which they were trapped for centuries. By generating the greatest good for the greatest number, free-market capitalism is the most moral economic system ever devised. And because of that, it is not necessary to judge whether actions of individuals or firms in the marketplace are moral or immoral. Business is amoral.
But in recent years, our confidence in the moral and economic superiority of free-market capitalism has been eroded. Here in the United States, we have watched the bursting of two financial bubbles, struggled through two recessions and suffered through several decades in which almost all of the benefits of economic growth have been captured by the richest 10 percent. A series of accounting and financial scandals, coupled with ever-escalating pay for chief executives, bankers and hedge fund managers, has generated widespread resentment and cynicism. While some have prospered from globalization and technological change, many have been left behind.
A decade ago, 80 percent of Americans agreed with the statement that a free-market economy is the best system. Today, it is 60 percent, lower than it is in China. One recent poll found that only 42 percent of millennials supported capitalism.
Part of our disquiet has to do with the inability of the market system in developed countries to continue to deliver a steadily rising standard of living to the average household. But another part of it reflects a nagging suspicion that the system has run off the moral rails, offending our sense of fairness, eroding our sense of community, poisoning our politics and rewarding values that easily degenerate into greed and indifference.
What happened over the past 30 years is that American-style capitalism became the victim of its own success. By the late 1970s, the U.S. economy had lost its competitive edge as innovation lagged, productivity sagged and costs soared. Under pressure from foreign suppliers, upstart rivals and unsatisfied investors, big corporations were forced to retool and restructure—and those that did emerged stronger than ever. In the process, “maximizing shareholder value” became the new business mantra.
But what began as a useful and necessary corrective for an economy that was losing its competitive edge has now become a corrupting dogma pushed to an extreme. For too many companies, “maximizing shareholder value” has provided justification for bamboozling customers, squeezing employees, avoiding taxes, despoiling the environment and leaving communities in the lurch. And for too many Americans, capitalism is now viewed as an unsavory system of organized greed in which it’s every man for himself.
It is that morally cramped model of capitalism that for a generation has been taught in business schools and economics departments, enshrined in corporate law and demanded by Wall Street investors and money managers. And it is the same model that led business leaders to abandon their much-needed role as stewards of the economy and hop into bed with the tea party and then Donald Trump.
Now, after decades of preaching that what was good for General Motors is good for America, corporate leaders have acknowledged that it might actually be the other way around — that what’s good for America is good for General Motors. However belated the conversion, their action this past week was courageous and impactful. We owe them our gratitude.