Thursday, August 11, 2005

Stakeholder Capitalism: a Dangerous Illusion

A news item that is worrying if you care about development. Kuseni Dlamini, a lecturer at Wits University, Johannesburg, describes what he calls “A capitalism SA can call its own” in Business Day.

The piece opens with a statement: “DEPUTY Finance Minister Jabu Moleketi’s call for business to embrace stakeholder capitalism is the right call at the right time, coming from the right person.”


That is worrying. When politicians advise business on what they should do, we can be sure that the advice should receive the most cautious response. Advice often precedes legislation to enforce the advice (especially when the advice proves unsatisfactory and politicians conclude those not heeding it are to blame). Adding new layers of decision-making to business is not normally a recipe for economic success. It has never worked anywhere else.

‘Stakeholder capitalism’ is an extension of the ‘Welfare capitalism’ of Germany, France and Netherlands; not shining examples of success recently, though they probably look good to people looking to solve serious structural problems in South Africa.

Kuseni Dlamini argues his case by a criticism of Adam Smith, plus a sideswipe at Karl Marx (to show balance?). He writes:

“Adam Smith argued that the trickle-down effect of capitalism ensured that everyone, including the poorest of the poor, would benefit from the system and thus ensure its continued profitable existence.”

Smith most certainly did not say anything about ‘the tickle down effects of capitalism’. For a start he never knew anything about capitalism, a phenomenon unknown in the 18th century; the word capitalism was first used in the 1850s, long after Smith died in 1790. Moreover, to link Smith’s name to the ‘trickle down’ effect is to misunderstand his most important insight: it was the division of labour and the necessary phenomenon of ‘truck, barter and exchange’ that would raise living standards of ‘the poorest of the poor’ and create employment for those without it.

For a developing, such practical policies seem more appropriate than experiments with an untried ‘stakeholder capitalism’. South Africa is a big country: why not designate a slice of it for an experiment that is sure to work: a free zone for people to practice the ordinary capitalism tried an tested elsewhere? Just a thought; trying to be helpful.

For the optimum conditions for increasing the division of labour and extending markets, you do not need ‘stakeholders’, ‘politicians’ and others to lecture people how to engage in this process. You need liberty, the rule of law, the rights of property, the sanctity of contracts and the absence of monopolies (usually promoted by businessmen and their employees).

Dlaminia continues:

“Smith exaggerated capitalism’s ability to redistribute wealth to the poor. He failed to foresee the greed and criminal tendency of some capitalists, such as those at Enron, Parmalat and WorldCom.”

What a charge sheet against a man who lived before capitalism, the industrial revolution, the advance of technology, and the very organizations that made capitalism possible, including giant corporations like Enron, Parmalat and WorldCom! He ‘failed to forsee’ events in the next two centuries! What rubbish is this? Who did forsee them? Nobody, of course.

Smith was very well aware of the capacity for ‘merchants and manufacturers’ to act against the interests of their consumers and society’s general interests in economic growth. He had enough detailed criticisms against the traders and tradesmen who made up commercial society in the mid-18th century without having to add the universal capacity for a minority in all classes for illegal and immoral acts to the critique he made of them in “Wealth of Nations”. A minority of criminals exists in all societies, at all levels, including governments and universities (and, I dare say, there have been one or two found in the ANC).

However, enough said. I leave the last word to Kuseni Dlamini:

“Buzz words such as stakeholder capitalism run the risk of meaning all things to all people, yet, in the ultimate analysis, yielding no tangible benefit.”

I could not put it better myself as a description of the most likely outcome of freely taking the advice of Deputy Finance Minister, Jabu Moleketi, on stakeholder capitalism.

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