I am a big fan of capitalism. It has lifted more people out of poverty and driven more progress than any other economic system in human history. But we are also experiencing significant negative consequences as a result of a departure from its original principles. As a widely adopted system, capitalism has seen various versions emerge over the years. Here, I want to compare two types of capitalism: Compassionate Capitalism and Crony Capitalism. I will briefly examine their societal and economic impact using Adam Smith's classic 1776 book The Wealth of Nations and his earlier (1759) Theory of Moral Sentiments as references. Both books arguably provided the original source material for what we call capitalism.
Compassionate Capitalism encourages businesses to prioritize social responsibility while pursuing profits. It emphasizes the well-being of employees, customers, vendors, the environment, and the communities in which they operate. In contrast, Crony Capitalism is today’s dominant economic system. It is a system that allows, and even encourages, businesses to use their political and economic power and influence to gain unfair advantages over their competitors. It focuses on maximizing profits at the expense of societal well-being.
The Wealth of Nations emphasized the importance of competition and mutually beneficial trading in driving economic growth. In a competitive market, businesses are forced to innovate and provide better products and services to attract customers. Compassionate Capitalism encourages healthy competition while ensuring that businesses do not engage in unethical practices that harm society and compromises overall well-being. It recognizes that businesses have a responsibility to improve the lives of the people they serve. Why else offer a product or service? Indeed, within this model, the purpose of business is to enhance the possibility of thriving for all while also making the requisite profit necessary to keep the business viable. The operative thesis of Compassionate Capitalism is rooted in enlightened self-interest and uses well-being as the metric of success (see: Just Capital).
In contrast, Crony Capitalism stifles competition and innovation. It allows – even encourages – businesses to use their economic and political power (i.e., Citizen’s United) and influence to gain an unfair advantage over their competitors. This creates an uneven playing field, limiting economic growth and harming society. Crony Capitalism leads to income inequality, political polarization, and environmental degradation as the benefits of economic growth are concentrated among a small group of wealthy individuals, corporations, and political power brokers. The operative thesis of Crony Capitalism is rooted in rational self-interest.
Smith's Theory of Moral Sentiments emphasizes empathy and compassion in a healthy society. Compassionate Capitalism aligns with this philosophy by encouraging businesses to prioritize the well-being of their employees, customers, and communities – an enlightened self-interest. As cited above, Crony Capitalism is driven by self-interest and greed (see: Greedflation) and is rooted in a mindset of scarcity that inevitably leads to accumulation of profit, market share, resources, and dominance as the metric of success.
The invisible hand of commerce Smith speaks about in The Wealth of Nations is a metaphor for how self-interested individuals operate through a system of mutual interdependence. The idea of the invisible hand is often misunderstood as an endorsement of unregulated capitalism or selfish behavior. In reality, Smith believed that the market could only function properly (i.e., benefitting all) when it was regulated by a strong moral code and a sense of social responsibility. This was the mechanism by which Smith envisioned a tempering of an individual’s toxic selfishness. The invisible hand was a recognition that individual self-interest, properly channeled, can lead to market and societal benefits – again, enlightened self-interest.
Compassionate Capitalism is a more ethical, generative, and sustainable economic system than Crony Capitalism. It encourages businesses to prioritize the well-being of society while also pursuing profits that are necessary to keep a business viable, thus creating a more equitable and just society where everyone can benefit from economic growth. Crony Capitalism harms society (and business) in the long run by prioritizing rational self-interest, and encouraging accumulation, and greed. By adopting the tenets of Compassionate Capitalism, we can create a better future for ourselves and future generations. The future of business is making the future its business. And if the purpose of business is recognized as enhancing the possibility of thriving for all, it will be a future worth committing to.
If you would like to learn more about Compassionate Capitalism and the kind of mindset and leadership required to make it so, you can request a free copy of my #1 international best-selling book Compassionate Capitalism: A Journey to the Soul of Business by emailing your request using this link.
