Exploring Capitalism

11 Feb
*Warning: this one’s gonna be lengthy!*
For my Communications and Culture class, we were recently asked to write about a prominent figure from the 18th Century and compare them to “cultural artefacts” in modern popular media. Since EWB does a whole bunch of work within both small-scale and global market systems, I thought it might be useful to look into the grand-pappy of free markets, Adam Smith. Zipping back over 200 years in time to learn about modern systems might seem a bit excessive, but I found that The Wealth of Nations actually pretty applicable to EWB’s ventures, including Business Development Services (BDS), Agriculture Value Chains, the Canadian Fair Trade Network, and Kulemela. In my paper, I compared The Wealth of Nations to an article from the Harvard Business Review, which BDS actually cited in their recent strategy update for EWB’s National Conference. You gotta take full advantage of assignment descriptions with loopholes in them!
I may just be self-indulgently recycling my schoolwork, but I think it’s relevant…(I tried to chop out any excessively academic asides)
 “The times that we live in demand institutions of new and more functional kinds: institutions that overlap national boundaries and serve transnational social and economic needs.”  Cosmopolis
                In any exploration of existing societal systems, an examination of the systems’ direct history may provide clarity for understanding current structures, and may frame discussions of the future of the system. As obvious as it might seem, to learn from the past, to understand the present, and to plan for a better future is exceedingly difficult to do well. Arguably, the systems of the Modern  Era have been shaped by a few people who were exceptional at communicating their thoughts about the past, present, and future. One such historical figure was Adam Smith, whose most famous work, An Inquiry into the Nature and Causes of the Wealth of Nations, has so greatly influenced our contemporary economic system that he has been cited as the father of modern economics . This influence may also be seen to have spread beyond the boundaries of our economic system, by enabling the proliferation of many values which we associate with modern Western societies, such as freedom, equality of opportunity, and competitive growth.
                This paper will examine The Wealth of Nations as one of the influential works of Modernity, in relation to a contemporary article, “Creating Shared Value” by Michael Porter and Mark Kramer, which demonstrates how many of Smith’s ideas have evolved . Both Smith and Porter & Kramer call into question the existing economic norms of their respective societies. They propose a more “ideal” way of moving forward, by replicating the best emergent properties of the current system, and by discarding those elements which are ineffective or harmful. These two works will be studied with reference to the progression of capitalist theory. To further illustrate the respective authors’ ideas, we will also explore how these theories might look within a contemporary small business.
         Adam Smith wrote The Wealth of Nations (1776), working within the relatively new discipline of economics, in the 18th century.  It remains one of the best known titles in economics to this day. It is a work characteristic of its age, conveying both remarkable optimism for progress in the future, and dissatisfaction with established societal norms.  “Smith attacked the restrictive practices of mercantilism and wished to free the economy to operate in accordance with the laws of nature.”(CWT 166) The selection presented in the Classics of Western Thought textbook shows Smith’s detailed understanding of the division of labour and the principles that operate within free enterprise economy.
                More specifically, Smith discusses the economic benefits of the division of labor, how labor divisions came about, how natural and market prices are determined by the “invisible hand”, and how increasing employment and wages of labor eventually result in the increasing wealth of the entire nation. Rather than directly summarising The Wealth of Nations, let us explore a hypothetical modern business venture and relate its elements to the ideas outlined by Smith. In the same way that Smith used the example of a tribal bow-maker trading for cattle in his writing, I will use a modern web designer and her father’s farm to explore the intended potential outcomes of Smith’s ideas.
Ani  is the daughter of a fish-farmer, who has always loved creating websites and writing. She has never had much time to develop her skills, because she spends so much time cooking, cleaning, gardening and helping her father with the fish. One day her father asks her to focus on creating a website for the farm. Using this as a chance to build her skills, she spends a couple of weeks creating a website for marketing and merchandising her father’s fish, with an added blog about proper fish care. Over time, the website brings in many new customers and allows for online sales of merchandise. This increase in business allows them to stop growing their own vegetables. They can buy more food using profits from their fish, than they had ever been able to grow on their own. Ani barters for more freedom with her father, so that she might spend more time working on the website and blogging. The more quality online content Ani produces, the more profitable the farm becomes, and soon they are able to hire staff and expand the business. Additionally, demand for their fish products continually increases, which allows them to raise prices and invest in equipment to make the farmwork more efficient. Eventually, Ani is able to focus solely on web design and blog writing. She gains a reputation as an expert within the fish-farm community, and was able to publish her accumulated blog posts into a book. The result is that Ani gains her own independent income and she and her father lead more comfortable lives.
                The example of Ani illustrates Smith’s argument that labour is divided so that individuals may become more skilled in a particular area, and thus generate greater wealth with the surpluses of their expertise. They reduce time lost in transition, by focussing on a single task, and find ways to streamline their work using technology. By innovating and evolving, individuals can gain an advantage over their competition, and make their surplus products even more valuable. Every person and specialization has value, and may profit from their usefulness to others. Furthermore, as experts and skilled laborers come together, wealth may be acquired and distributed even more effectively. Within this system, no person is able to meet all of his/her own needs individually, but each individual has a greater opportunity to have more of their needs met through the exchange of surplus capital. Society as a whole benefits when each individual competitively pursues their own interests.
                When we examine how closely our current economic system is aligned with Smith’s essential ideas, it becomes apparent how much our societal norms have shifted since The Enlightenment. The example of Ani probably seems unremarkable to the contemporary reader, but many of the things which Smith wrote about were considered to be uncommon and exceedingly liberal at the time. Just as Smith attacked the cruelties of 18th Century mercantilism, and proposed a more equitable and universally beneficial alternative, Porter and Kramer speak to the flaws of modern capitalism and draw attention to better business practices for the coming future.
                Porter and Kramer’s work may not be the economic treatise of our era, as Smith’s work has proven to be, but it provides a clear articulation of our existing system of capitalism, and of what many hope for the future of global economic interactions. Perhaps the best summary of this paper can be taken from its own title page:
“Capitalism is under siege….Diminished trust in business is causing political leaders to set policies that sap economic growth…. Business is caught in a vicious circle…. The purpose of the corporation must be redefined around Creating Shared Value: How to reinvent capitalism – and unleash a wave of innovation and growth.”
        Porter and Kramer outline how the capitalist system has been increasingly viewed as a cause of social, environmental, and economic problems. Companies are being seen to be pursuing their own ignoble goals at the expense of the broader community (64). They argue that a large part of the problem lies with companies’ narrow focus on short-term financial performance, rather than on long-term sustainable success. However, much like Smith, they see that there do not need to be trade-offs between economic efficiency and social progress . Porter and Kramer acknowledge that “capitalism is an unparalleled vehicle for meeting human needs, improving efficiency, creating jobs, and building wealth.”(64) They propose that these strengths of the system could be harnessed in order to drive innovation and productivity, creating value which will simultaneously grow the global economy and build the capacity of local communities. This could be accomplished “by re-conceiving products and markets, by redefining productivity in the value chain, and by enabling local cluster development.”(65) Creating shared value is not about redistributing wealth; instead, it is about expanding the total pool of economic and social value, by cultivating holistic business effectiveness. (65)
                To explore these ideas, let us return to Ani for a moment. Just as the ideas of free enterprise enabled Ani to acquire capital value and build a better lifestyle for herself, the ideas of “Creating Shared Value” could improve her business returns, build success within her community, and help her to find greater fulfillment in life.
Ani and her father have been incredibly successful in their business, but now Ani wants to help out their community, and try to be more efficient with their farming practices. Ani has been doing some research, and would like to try out integrated aqua- agriculture. She and her father decide to hire more laborers and gardeners from the local community, and implement this new method using their old garden plot. Within a year, their farm is producing vegetables and chickens, in addition to fish, with less material waste overall. Also, they are able to increase profits by selling their produce to upscale restaurants in the nearby city, and selling any remainders at a Farmer’s Market for a reduced price. The added profits allow them to provide greater benefits to their employees, which improves employee productivity, job satisfaction, and general health. Their nutritious, affordable, and delicious food develops a fiercely loyal customer-base within the community. The shared value of their business continues to grow as Ani and her father build more local trading relationships. Ani continues to blog openly about all of their farming and business experiments. Her concrete, tailored metrics for success impress local authorities, who decide to develop policies which enable the success of businesses like hers. Soon, this model of farming is being replicated throughout the province, which boosts the regional economy, increases both employment and socio-environmental awareness, and strengthens community relations.
Overall, Porter & Kramer are advocating for a more sophisticated form of capitalism imbued with a social purpose. Smith original work argued that individual success en masse would benefit society. Generally speaking, it has. And now Porter & Kramer argue that “if all companies individually pursued shared value connected to their particular businesses, society’s overall interests would be served.” (77) Their proposal for a new form of capitalism seems to have strong precedents, and to have been thoroughly considered. However, this model may be met with resistance from well-established institutions. One challenge may be the need for business and government collaboration to create regulations that are beneficial for society, since it would require extensive policy changes with multiple consultations and revisions. Difficulties might also arise when developing entrepreneurial mindsets and managerial skills in leaders of the social sector, while also integrating social and environmental awareness into business school curricula. That said, I think that their model for “Creating Shared Value” has tremendous potential to drive positive change if it were to spread throughout our economic systems. Works like these are sort of like the stepping stones of economic literature: they help us to understand the past, critique the present, and step forward to create a better future, just as Adam Smith did in his writings of the late 1700s. The Wealth of Nations helped to push the Western world into a new age of business practices and social prosperity, and the ideas of “Creating Shared Value” might do the same for coming generations.

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