Creative Capitalism

Corporate Social Confusion

By Martin Wolf

(This is an excerpt from a speech delivered in January 2007 before Harvard Business School alumni in London.)

The notion of corporate social responsibility is intensely confused. In particular, it mixes up three quite distinct ideas: intelligent operation of a business; charity; and bearing of costly burdens for the benefit of society at large. The first is essential; the second is optional; and the third is impossible, unless those obligations are imposed on competitors.

Profit-maximization as the sole goal of a corporation

By Martin Wolf

What is the goal of the limited liability, joint-stock company, the core institution of the contemporary capitalist economy? What implications does the answer have for such a company's freedom to be “creative” in the way Bill Gates uses the term? The classic answer to the first of these questions, repeated often in these discussions, is that its aim is to maximise profits. This statement is not false. But it is vastly too limited. Here are ten points relevant to this theme.

What Bill Gates really means by creative capitalism

By Martin Wolf

Like most economists, I find the notion that we need a creative form of capitalism somewhat peculiar, particularly from the most successful – and, arguably, one of the most ruthless – capitalists of the past three decades. How can a man who played such a big role in the development of today’s information technology industries believe that capitalism is not creative. Creation and -- as Joseph Schumpeter remarked -- destruction are what capitalism does.

So what is Mr Gates trying to say? My interpretation comes down to just two simple points: first, capitalism is more innovative, more flexible and, indeed, more creative than any other system known to humanity; and, second, it cannot do anything if there is no demand. We can see needs (yes, my fellow economists, there are such things as needs, as you would discover if you were deprived of water for a few days), but, in the absence of purchasing power, these do not become demands (you might just die of thirst, instead).

What makes profit-maximization possible

(The problem with competitive capitalism is not that it is uncreative, but that it is unnatural.)

By Martin Wolf

I agree with everything Professor Landsburg says. The difficulty is not with what he says, but with what he does not say. What he does not address is how a capitalist system works. And as soon as one asks this question, one realizes that what distinguishes successful capitalism is not how broadly the profit-maximization principle, beloved by economists, applies, but how tightly circumscribed it has to be.