Klaus Schwab is the founder and executive chairman of the World Economic Forum (WEF), and a proponent of transitioning economies to a “stakeholder capitalism” model. Under Schwab’s vision, private corporations would eschew shareholders’ interests in favour of serving “stakeholders” such as governments, international bodies, environmental non-governmental organizations, and sundry groups of woke activists.
According to Schwab, instead of focusing on profits, corporations should commit to ESG (Environmental, Social, and Governance) goals, such as promoting diversity and fighting climate change. Speaking this month at the WEF’s Jobs Reset Summit, he claimed that corporations not committed to ESG metrics and stakeholder capitalism are “on the wrong side of history.”
This idea of stakeholder capitalism, however, is something of an oxymoron. Under the capitalist system, people own property and can use it however they see fit, as long as they’re not hurting anyone else, but under Schwab’s vision, governments and other stakeholders get to tell corporations what to do.
In his essay Understanding the Left published last year, economist John Cochrane of Stanford University’s Hoover Institution pointed out that in the United States, many in the Democratic Party are pushing for greater government control of corporate boards, and for governments to set out the purposes of corporations.
“Stakeholders on boards and a federal charter? The purpose is explicit,” Cochrane explained. “Power for those who run the government to tell large corporations who to hire, who to fire, what to make, what to buy, how much to charge and pay. And power to demand those businesses’ political support.” That doesn’t sound much like capitalism at all.
Milton Friedman warned against the subversive nature of stakeholder capitalism, most notably in his 1970 New York Times Magazine essay, “The Social Responsibility of Business Is to Increase Its Profits.” Friedman was influenced by Adam Smith, who famously observed that butchers, bakers, and brewers keep us well fed – not because they are benevolent, but because they want to earn money.
In contrast to the profit-seeking butchers, bakers, and brewers, Smith wrote, “I have never known much good done by those who affected to trade for the public good.” Put another way, spare us the do-gooders. The interests of society are better served by those in business to make money; indeed, it is only by satisfying consumers that butchers, bakers, brewers, and other profit-seekers in competitive markets can earn money.
Stakeholder advocates say this model has not served society well, but they are flatly wrong. For example, one of their main grievances is that societies that practise free-market capitalism are supposedly rife with inequality and unfair discrimination. But in reality, companies in competitive markets can ill afford to discriminate unfairly against customers or workers – it would mean losing business or having to pay more for labour.
Similarly, stakeholder advocates say that corporate activity has destroyed the environment and contributed to catastrophic global warming. However, it’s thanks to the massive and widely dispersed wealth created by profit-seeking companies that people in the industrialized world have the resources to care about the environment – and to protect themselves from hostile weather conditions, as evidenced by the sharp reduction in the death rate from climate-related disasters over the past century.
People shouldn’t be fooled by the visions of Klaus Schwab and others who dream of a better, greener, and more equal “stakeholder” capitalism. Such visions are grounded in economic error, and are in the end just another play for expanding government power and economic meddling.
Matthew Lau is a fellow at the MEI. The views reflected in this opinion piece are his own.