The True Story Of Capitalism.
Many people today are skeptical about capitalism. Suspicious of it. In some cases, downright hostile. These people believe – or have been led by others to believe – that capitalism is bad for society overall. They believe that capitalism is extractive – it extracts work and effort from masses of people to produce financial reward for a narrow few, with limited benefit (or maybe a net deficit) left for those who do the work. A particular sliver of the financial elite has some specific techniques for extracting the vast bulk of available value for themselves via special tools such as hedge funds, currency trading, and all kinds of esoteric instruments. They believe the biggest corporations extract wealth for shareholders and executives to self-reward themselves with stock awards, stock options, share buybacks, and dividends. They believe that there is monopolistic control over markets exerted by these large-scale corporations. They believe that first-world countries and corporations take value from less-developed countries via resource extraction, cheap labor, and short-term economic activities that don’t leave behind long-term infrastructure or institutions. They believe the inequality of wealth and income in capitalism is deliberately and malevolently manipulated.
But none of this is the true story of capitalism. There are two good places to start in telling the real story. The first is 19th-century America. After the Civil War, the US was in economic expansion mode. The population was growing, supplemented by immigration, and was economically mobile, moving West, establishing cities, starting businesses, learning how to enjoy new lives. Technology was evolving, bringing new enablements for those new lives, including affordable illumination (from oil refining), rail transportation (from steel making and steam engines), better clothing (from sewing machines and new fabric technologies), better food (from mass manufacturing and mass distribution made possible by factory organization) and more. It was in this environment that great entrepreneurs invented customer capitalism. They identified the unstated, unmet needs of customers – such as affordable light for families at home at night for a better quality of life and extended productivity, safe and nutritious food, soaps for more hygienic washing, better communications – and designed systems of unprecedented scale and complexity that could be implemented to meet those needs. Factories, production lines, precision machines for manufacturing, international supply chains, secure packaging, mass distribution and mass marketing – these were all innovations of the times to serve customers in better and better ways. The energy behind these innovations came from a new invention, unique to America at the time: the corporation and its managerial methods. The entrepreneurs invented the managerial corporation because it was necessary to do so to harness the vast potential for value creation of their machines, factories, supply chains, and transportation and distribution networks. The challenge had never before been encountered, but the coordination enabled by new decentralized corporate management systems solved the problem.
Customers were learning what they could want in the new world of technology, manufacturing, and economic expansion. Those corporations that were able to fulfill those new wants were the ones to thrive and grow into powerful commercial entities of a new type, size, and form. They became the engines of capitalism, doing far more to advance the capacity and achievements of the new country than anything than government could.
At the same time, in the heart of Europe, a group of researchers in economics were discovering the principles that would guide the further development of customer capitalism as a system of organizing the economy. First, they established the principle of value that guides all economic production: value is in the mind of the customer. It’s not a number or a price, it’s a flow of life enjoyment, a flow of experiences becoming better and better over time, satisfying ever more needs and fulfilling ever more wants. The job of the corporation is to facilitate and sustain this flow.
The method of doing so, identifying value (what the customer is learning to want), and designing new and innovative ways to enable them to enjoy the future experience they are anticipating via a method called entrepreneurship, was another discovery of these economists. Another of their principles, a crucial one, is that entrepreneurial value generation is an adaptive, experimental and creative activity, and can’t be planned in advance or from the top down. This excludes government, as a central planning agency, from any role in customer capitalism, and also guides the private corporation in the design of their organization and processes to make them adaptive to feedback from customers and markets. Those that become bureaucratic and unresponsive are condemned to fading and failure. Continuous innovation is the only route to sustained success.
The early research came from the University of Vienna and has inherited the name Austrian economics over time. But the research tradition has continued in the US after many of the pioneers fled Europe to do their work in universities in the US. The continued further development of Austrian economics in the USA nurtures and enhances the innovative free market traditions of customer capitalism.
These two parallel streams of corporate commercialism in the US, harnessing technology and organization to profitably serve customer needs, and the continuous refinement of free market economic principles and institutions to make that commercialism viable, combine in the true story of capitalism. Capitalism is for the benefit of all: first and foremost for consumers, whom corporations and other producers are aiming to serve and please. The economic activity of doing so creates jobs and meaningful employment for many. Corporations aim to gain the support of the communities in which they establish offices and factories, improving community life, especially for the families that live and work and school their children there. And for investors, the success of corporations in serving customers can result in the profits that pay dividends and spark stock appreciation. And the system requires the institutional support of a prevailing set of economic thinking to strengthen the culture and mindset that attracts the best people to roles as entrepreneurs, managers, investors and workers.
Customer-focused corporations and the economics of entrepreneurial value creation are the true story of capitalism.
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