"Ideas, Both Right and Wrong"

How a 1970s debate on the purpose of business still resonates today

"The obligatory suitcase full of cash shot" by Jeremy Johnstone is licensed under CC BY-NC-ND 2.0.

Conspiracy theorists often get obsessed about vested interests. If you can uncover vested interests, perhaps by working backwards from events to their alleged causes, it is supposed to help you understand the complexity of a fast-moving world. In practice, of course, it rarely works well, unless you happen to be a con artist interested in using simplified narratives to hook in suckers.

British economist John Maynard Keynes realized that vested interests aren’t as important as many people think nearly 100 years ago. He famously published the following words in 1936:

“[T]he ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas… sooner or later, it is ideas, not vested interests, which are dangerous for good or evil.”

One way of understanding this quote is to imagine a river. Academics and thinkers have a camp upstream, where they engage in vigorous debates. Once in a while, a complex and original idea is tossed into the river, where it slowly floats downstream. Journalists, commentators, teachers, bloggers and others have a camp a little lower down the river. We occasionally fish out an idea that floats past and then have our own fierce debate about it. We launch our own simplified versions into the river, where they are fished out by ordinary members of the public, who have another camp downstream. The simplified ideas are the basis for more fiery debates, which are often on social media nowadays.

We can see how this works in practice by looking at a debate in the academic camp in the 1970s. In the red corner was libertarian economist Milton Friedman. He was born to working class Jewish immigrants in Brooklyn in 1912 went on to have a long and distinguished career at the University of Chicago, where he developed the theory of monetarism. It was based on a respect for the power of markets.

In 1970, Friedman published a famous essay in The New York Times, which argued that businesses have no duty to society other than increasing profits. This might seem strange to many people who haven’t come across the idea before, but try turning it around before dismissing it. What happens when a business no longer makes profits? It will have to take tough decisions, such as slashing its workforce, raising its prices, breaking itself up, selling itself at firesale prices or entering insolvency. Few of these decisions will be good for employees, executives, shareholders, customers, suppliers or communities.

As Friedman’s idea about profits drifted downstream, though, it became adopted by businesses as an excuse for offshoring and downsizing. Multinational companies routinely put shareholders above employees. Friedman passed away in 2006, but his idea continues to thrive in executive suites around the world.

In the blue corner was Klaus Schwab. He was born in Switzerland in 1938, but his parents moved to Germany during World War II. He studied engineering, economics and business administration and became an evangelist for stakeholder capitalism. In 1971, the year after Friedman’s article, he published a booklet in German with Hein Kroos, which argued that management should serve all stakeholders, including employees and clients, rather than just shareholders.

Crucially, Schwab founded the European Management Forum in 1971 to promote his vision of stakeholder capitalism. It organized annual meetings in Davos, Switzerland. Politicians were invited from 1973 and it changed its name to the World Economic Forum in 1987. The meeting can be a source of obsession for anti-globalist conspiracy theorists, who try to work out its vested interests instead of sitting down and reading one of Schwab’s books.

On the face of it, stakeholder capitalism might seem more sensible than businesses that just try and grow their profits. However, the idea can be problematic. Economics textbooks talk about the trade-off between efficiency and fairness, although more recent research has questioned whether this is really the case.

Meanwhile, human resources departments enforce the new orthodoxies of stakeholder capitalism with very little debate. Believers in ancient religions that have survived into the current world are particularly sensitive to these issues and often form the core of the backlash.

The upsteam debate between Friedman and Schwab has had deep implications for society as it moves downstream. The uncertainty generated by the loss of jobs for life is a factor behind the rise of populist movements, many of them led by narcissistic leaders. Right-wing populists are able to leverage anger about “woke capitalism” and “globalism” as part of a culture war, which is often based on tribalization.

If we take a step back, we can see that the debate is another example of the clash between hedgehogs and foxes. As we have seen, hedgehogs like Friedman and many CEOs interested in driving up the share price (as well as all conspiracy theorists) like to have one model that explains everything. On the other hand, foxes like Schwab and many of his guests at Davos prefer multiple models, which run simultaneously. The comments are open. See you next week!

Further Reading

How Davos became a target for conspiracy theorists

Sharpen Your Axe is a project to develop a community who want to think critically about the media, conspiracy theories and current affairs without getting conned by gurus selling fringe views. Please subscribe to get this content in your inbox every week. Shares on social media are appreciated! If this is the first post you have seen, I recommend starting with the first-anniversary post, which includes links to a free book.

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