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Is ‘Stakeholder Capitalism’ Newspeak for Economic Fascism?

The changes favored by the ‘Great Reset’ movement would force businesses to serve the interests of ruling elites and leave true stakeholders out in the cold.

Image Credit: World Economic Forum from Cologny

Leaders of the World Economic Forum are seeking to implement a Great Reset of capitalism whereby “global stakeholders” cooperate to achieve “shared goals.” In the true spirit of not letting a crisis go to waste, they see the COVID-19 pandemic as presenting a unique opportunity to push their agenda.

“The level of cooperation and ambition this implies is unprecedented. But it is not some impossible dream,” World Economic Forum Executive Chairman Klaus Schwab recently observed. “In fact, one silver lining of the pandemic is that it has shown how quickly we can make radical changes to our lifestyles.”

Of course, when they say “our lifestyles” they mean your lifestyle, not their own. Their preferred vehicle for achieving their goals is other people’s businesses. In short, what they want is for private businesses to serve the interests of their own curated list of stakeholders rather than (as they see it) concentrating on returning profits to business owners. They want governments to pass laws and tax regimes to cajole businesses towards their favored ends. Since this arrangement still involves a modicum of private ownership of the means of production, they call it “Stakeholder Capitalism.”

It is important to recognize the subversive use of language here. Such a system is all about sidelining the true stakeholders, and undermining capitalism. This is Orwellian Newspeak at its best, since it misuses the word “stakeholder” and is actually closer to economic fascism than capitalism.

‘Stakeholder Capitalism’ Versus True Stakeholders

There is one reliable way to know if a business is serving the needs of stakeholders: profit and loss. Absent any government bailouts or monopoly privileges, the higher the level of profit, the greater the degree to which stakeholders’ needs have been balanced and served.

Profit means value has been created for all stakeholders, by turning resources into finished goods that people value more highly than the resources used to make them. Losses indicate that scarce resources have been wasted and value destroyed, turning out finished goods that are worth less than the resources that went into them.

Behind the façade of ‘society,’ there is always a group of power-hungry doctrinaires and exploiters, ready to take your money and to order your actions and your life.

In order to please customers and generate profits in a world of uncertainty, companies need entrepreneurial insight to decide what to produce and in what quantities and varieties. They also need to attract good employees, material suppliers, a management team, and financial resources, all on favorable terms. Any failure will result in losses. Under this arrangement – which could be called unhampered capitalism – a company does not need to be told by some outside expert who their “stakeholders” are.

The profit and loss system offers them the information they need and reveals any mistakes. As Ludwig von Mises explained:

Profits convey control of the factors of production into the hands of those who are employing them for the best possible satisfaction of the most urgent needs of the consumers, and losses withdraw them from the control of the inefficient businessmen. In a market economy not sabotaged by the government the owners of property are mandataries [servants] of the consumers.

When those who seek to modify capitalism speak of “stakeholders” they will often include customers, employees, suppliers and shareholders on their list, to at least give some context. But invariably the aim of these reformers is to extend the list to include nebulous collective entities like “societies” and “communities” or even “global” stakeholders. Since these collectives cannot speak with one voice, these social reformers are all too happy to speak on their behalf and lay out the demands.

Imagine a pizza restaurant, Joe’s Pizza. They exist in a society, which includes:

A: people who enjoy eating Joe’s pizzas

B: people responsible for supplying the pizzas (at all levels of the supply chain)

C: everybody else

It is easy to see who the stakeholders are. Group A profits in pizza, which they prefer over the money they offer for it; Group B profits through remuneration which they also prefer. The entrepreneur, being the residual claimant, profits only if they do. Meanwhile, Group C is unaffected, being left alone to do other things they prefer above eating or producing pizza at the prices offered.

It is possible there exists a fourth group:

D: those who suffer a negative externality, such as neighbors who put up with bad smells or rats coming from Joe’s bins.

This fourth group ought to have a legal right to compel Joe’s to properly deal with their waste. Assuming this group has their property rights protected (thus joining group C), “society as a whole” is definitively better off from this endeavor, since all actions involved were voluntary. People either benefited from Joe’s, or were left no worse off. It is the job of entrepreneurs to coordinate this socially beneficial process, and profits or losses indicate success or failure.

Under German style Socialism, Mises explained, even before the outbreak of war, former capitalists were reduced to the status of ‘shop managers.’

Nobody serves “all members of society” directly. Yet all members of society, including group C, are benefited indirectly through this process, even those who cannot afford the products of the firm.

A highly profitable activity indicates an urgently felt need of consumers that is being underserved. The entrepreneurial process impels other entrepreneurs who see this profit signpost to move additional resources into this area. Alternatively, the reporting of losses becomes a signpost to avoid further destruction of value, freeing up resources for a more urgent need.

Through this process, consumer goods become increasingly more affordable, exhausting fewer resources in the process, and people’s productive efforts become increasingly valued.

Why Stakeholder Capitalism Is Socially Destructive

When global re-setters insist that “all” stakeholders should be represented, what they really mean is “I neither eat pizza nor help to produce pizza… but WHAT IS THE PIZZA SHOP DOING FOR ME?!”

It is a boldfaced attempt to substitute the interests of non-stakeholders for the interests of stakeholders, using surreptitious language to blur the line.

“Society as a whole” has no unified goal, and if it did there would be no way to ascertain what it was. So those who try to install “society” as a stakeholder in the activities of corporations, are eager to insert their own goals and interests.

Murray Rothbard puts it well:

Whenever someone begins to talk about ‘society’ or ‘society’s’ interest coming before ‘mere individuals and their interest,’ a good operative rule is: guard your pocketbook. And guard yourself! Because behind the facade of ‘society,’ there is always a group of power-hungry doctrinaires and exploiters, ready to take your money and to order your actions and your life. For, somehow, they ‘are’ society!

A better way to understand society is the sum total of all voluntary interactions between individual people. Voluntary activity is pro-social, while use of coercive force is antisocial. Those who want to hyphenate capitalism invariably prefer the use of government force over voluntary interaction.

Critics may consider eliminating the profit motive the equivalent of giving the Tin Man from Oz a heart; in fact it’s much more like Oedipus’ gouging out his own eyes.

It is important to understand how those who claim to represent the interests of non-stakeholders (by holding out their hand for a piece of the action) are actually doing social harm. If companies end up masking their level of profitability in order to appear more ‘ethical’ and placate the mob, the process of market alignment that indirectly benefits everybody is hampered. Resources that ought to be moved into an underserved area of production are not, as the ‘profit signal’ has been obscured.

Elsewhere, further resources are wasted as the ‘loss signal’ is cloaked by bailouts.

“Critics may consider eliminating the profit motive the equivalent of giving the Tin Man from Oz a heart; in fact it’s much more like Oedipus’ gouging out his own eyes,” as Professor Steve Horwitz put it rather brilliantly.

As this Wall Street Journal article explains, profits and losses keep corporate leaders honest, whilst a so-called stakeholder view allows them to be opaque or even corrupt. So our “great resetters,” in order to substitute their own interests for the interests of others, need to destroy the profit and loss system, leaving only their own will backed by force to guide productive efforts.

Stakeholder Capitalism as Newfangled Fascism

Let’s now turn our attention to the second weasel word in “stakeholder capitalism.” If you are confused about whether national socialism (a.k.a Nazism) is indeed a form of socialism, you should read this article and this one and this one.

Socialism means the abolition of private ownership of the means of production in favor of mythical “collective ownership,” but the brutal reality is that it is a system of forceful centralized control.

In the same vein, “for fascism the state is absolute, individuals and corporations [are] relative” said Mussolini. Either way, the holders of centralized power, by controlling production, control your life. They become the solitary “stakeholder” in all decisions involving material resources.

As Ludwig von Mises showed, without real private ownership there is no buying and selling and therefore no market price system, so the planners have no way of knowing what people value. They are flying blind, creating chaos in place of economic coordination. For his scathing but inescapable insights Mises had the honor of being intellectual enemy number one of both the Nazis and the Soviets.

In what Mises called Russian style socialism, the owner of the widget factory would be shot or sent the gulag, to be replaced by a party apparatchik, often with no background in widget production at all. Not only would there be no way of knowing whether widgets were socially beneficial, but you wouldn’t get very good widgets anyway.

Under what Mises called German style socialism, the former owner of the widget factory would be left nominally in charge, but made into a party apparatchik, using as much coercive pressure as necessary to force him to serve the interests of the state. This ownership in name only, is why people sometimes confuse national socialism with capitalism rather than correctly identifying it as another path to socialism. Resources are de-facto nationalized by different means.

A system that replaces the goals of true stakeholders with the iron will of ruling elites looks and smells an awful lot like economic fascism.

Under this system, there is also no way of knowing whether widget production is socially beneficial, since the widget factory is following state orders rather than responding to consumers. But nevertheless, by retaining knowledge from the past, things would still get produced, whether they are goods or “bads.” This is why Germany was able to produce abundant planes and other war machines in World War II – by harnessing private expertise for state ends; by the “merger of state and corporate power.”

Under German style Socialism, Mises explained, even before the outbreak of war, former capitalists were reduced to the status of “shop managers”, and:

No German capitalist or entrepreneur (shop manager) or anyone else is free to spend money on his consumption than the government considers adequate to his rank and position in the service of the nation… Nobody is free to buy more food and clothing than the allotted ration. Rents are frozen; furniture and all other goods are unattainable… Travel abroad is permitted only on government errands… German corporations are not free to distribute their profits to the shareholders. The amount of the dividends is strictly limited according to a highly complicated legal technique… For many years German business has not been in a position to replace its equipment… Warring Germany lives on its capital stock, i.e., on the capital nominally and seemingly owned by its capitalists.

This is a picture of “stakeholder capitalism” made manifest. To varying extents, all governments adopt these kinds of policies during wars or pandemics using what Robert Higgs calls the ratchet effect. This is why groups like the World Economic Forum view the COVID-19 crisis as a great opportunity.

I am not suggesting that Klaus Schwab and cadre aim to produce Messerschmitts and mustard gas. But whatever their goals are, if they were socially beneficial then no force and no “great reset” would be required to achieve them – people would voluntarily cooperate toward those ends. By contrast, the apparent need to overturn market cooperation using government coercion indicates their agenda is one that suits the elite, to the detriment of the voluntary society.

A system that replaces the goals of true stakeholders with the iron will of ruling elites, which retains nominal private ownership, but uses government force to pressure firms to serve centrally determined goals, looks and smells an awful lot like economic fascism.

  • Mark Hornshaw is a lecturer in Economics, Entrepreneurship and Management at The University of Notre Dame Australia.