• Shareholder capitalism and state capitalism have been the prevailing economic systems, but stakeholder capitalism offers a new, better system.
• Klaus Schwab explains the difference in this excerpt from the book Stakeholder Capitalism: A Global Economy that Works for Progress, People and Planet.
The world currently knows two prevailing and competing economic systems: shareholder capitalism, which is dominant in many Western economies, and state capitalism, which is prominent in many emerging markets.
Both systems have led to tremendous economic progress over the past few decades. They left us with a world that is more prosperous than ever before. But each has equally brought about major social, economic, and environmental downsides.
They led to rising inequalities of income, wealth, and opportunity; increased tensions between the haves and the have-nots; and above all, a mass degradation of the environment.
Given the shortcomings of both of these systems, we believe we need a new, better global system: stakeholder capitalism. In this system, the interests of all stakeholders in the economy and society are taken on board, companies optimize for more than just short-term profits, and governments are the guardians of equality of opportunity, a level-playing field in competition, and a fair contribution of and distribution to all stakeholders with regards to the sustainability and inclusivity of the system.
But how can we achieve this? What does it look like in practice? And where did the current two systems go wrong? Let us start with the last question first and take a closer look at the two prevailing systems of today.
Consider first shareholder capitalism. It is the form of capitalism in which the interests of one stakeholder, the shareholder, dominate over all others. Companies operate with the sole purpose of maximizing profits and returning the highest possible dividends to shareholders.
That is the force we have seen at work in the past few decades. Moreover, as companies increasingly became global, the power of unions evaporated, and the ability of national governments to act as an arbiter declined. It led to a situation where shareholders became not just preeminent nationally but dominant globally, and many other stakeholders—employees, communities, suppliers, governments, and the environment—lost out as a consequence.
In recent decades, another form of capitalism emerged as an alternative: state capitalism. It, too, is a capitalist model, if we follow the definition that a system is capitalist when “private actors own and control property in accord with their interests, and demand and supply freely set prices in markets in a way that can serve the best interests of society.”
Despite this, the state is considered the most important stakeholder and retains power over individual shareholders. The government achieves its dominant role in at least three ways. First, it keeps a strong hand in the distribution of both resources and opportunities. Second, it can intervene in virtually any industry. And third, it can direct the economy by means of large-scale infrastructure, research and development, and education, health care, or housing projects.
Theoretically at least, it solves a major shortcoming of shareholder capitalism because there are mechanisms in place to ensure that private and short-term interests do not overtake broader societal interests.
This system allowed Singapore, China, Vietnam, and more recently countries such as Ethiopia, to build a strong and growing economy, while keeping, if needed, private corporate interests in check. In fact, were
it not for state capitalism, large parts of the developing world may not have seen a major growth spurt at all.
But as economists such as Branko Milanovic (in his book Capitalism, Alone) have argued, state capitalism too has its fundamental flaws. Most importantly, given the hegemony of the state, corruption is a constant threat.
Favoritism can play a role in distributing contracts, and the application of the law can become arbitrary, given the lack of checks and balances. When those at the top of the state assess an economic trend wrongly, the vast resources they control risk getting misallocated. It creates an issue that is almost the mirror image of that in shareholder capitalism.
In both shareholder and state capitalism, the dominance of one stakeholder over the others is the system’s greatest flaw. In shareholder capitalism, shareholders’ aims are often the singular focus; in state capitalism, the
government wields too much power. We therefore advocate for a third system, which can be defined as stakeholder capitalism. So, what does this mean?
Stakeholder capitalism, first of all, is also a form of capitalism: individuals and private companies make up the largest share of the economy. This is, we believe, a requirement for a sustainable economic system: Private individuals and companies must be able to innovate and compete freely, as it unleashes the creative energy and work ethic of most people in society.
The economic activities of such private actors must also be protected and guided, to ensure the overall direction of economic development is beneficial to society, and no actor can freeride on the efforts of others. This is the kind of capitalism we ought to endorse.
But stakeholder capitalism does fundamentally differ from the other forms of capitalism we saw, in a way that overcomes much of their shortcomings. First, all those who have a stake in the economy can influence decision-making, and the metrics optimized for in economic activities bake in broader societal interests.
Moreover, a system of checks and balances exists, so that no one stakeholder can become or remain overly dominant. Both government and companies, the main players in any capitalist system, thus optimize for a broader objective than profits: the health and wealth of societies overall, as well as that of the planet and that of future generations. That interdependence can be seen in figure1.
It makes stakeholder capitalism the preferred economic system and the one we ought to implement going forward. If you would like to learn more about it, we invite you to read our book, “Stakeholder Capitalism” (Wiley, January 2021).
This text is adapted from “Stakeholder Capitalism: A Global Economy that Works for Progress, People and Planet, by Klaus Schwab with Peter Vanham.
Source: World Economic Forum
The Ethiopian Herald January 30/2021
