Business School

What’s Next for Capitalism? Look Back.

February 2, 2022  • Ideas Worth Teaching

Read business news in 2022—or any time in the last few years—and you might find it hard avoid an insatiable hunger for novelty. This is most evident in stories about innovations like cryptocurrency, NFTs, Web3 and the financial and social transformation they promise. But this focus on the new is also reflected in CEOs’ evolving statements on ethical purpose and stakeholder commitment. Surely, capitalism in 2022 is fundamentally different from what it was in years past—right?

James Hoopes

James Hoopes of Babson College encourages future business leaders to think deeply about that question. His course, The History and Ethics of Capitalism, won an Aspen Institute Business & Society Program Ideas Worth Teaching Award and helps students take a fresh look at the history of capitalism and what it means for the future. His approach places the writings of Adam Smith within a history of markets that begins well before the 18th century and reaches far beyond Europe. We spoke with Hoopes about his course, what he hopes students learn from the past, and how new today’s emerging paradigms of ethical business really are.

This year, BlackRock CEO Larry Fink titled his letter to shareholders “The Power of Capitalism,” and placed a special emphasis on capitalism’s power to combat climate change. As business leaders (Business Roundtable, for example) increasingly issue such statements, what do you think it reveals about contemporary understandings of the meaning and direction of “capitalism”?

It’s great that Larry Fink and lots of other business leaders call for action on climate change. But it’s a recurrent historical pattern for capitalists to hope that large scale crises can be dealt with by appeals to self-interest and profit. There’s nothing ethically new in his assertion that “climate risk is investment risk.”

Some find ethical newness in young entrepreneurs who do seem to be genuinely driven not only by profit but also by purpose. That’s probably also true of Larry Fink who, like many CEOs speaking to shareholders, may feel compelled to justify good action in terms of financial self-interest.

Harvard Business School’s Rebecca Henderson captures the spirit which is more often expressed by younger business people. She says an “authentic” purpose-driven person engages in “choosing to do the right thing and then fighting hard to find the business case to make it possible.”

Still, there’s really nothing new in youthful idealism which can fade over time. That’s why I call students’ attention to Aristotle’s idea that moral virtue results from habit. Adam Smith observed in The Theory of Moral Sentiments that “virtues” require “practice” without which “no habit can ever be tolerably established.”

It would be good if the young did not count on their youthful idealism and “purpose” to always be there. That would require them to learn and then live their long lives by the idea that moral virtue is achieved and sustained through constant practice.  That really would be something ethically new in the history of capitalism.

Some readers may find it surprising that few business school students are taught the historical development of capitalism. What are the benefits of understanding this context and how does this knowledge intersect with the technical or applied lessons more common in other parts of the curriculum?

Much of the business school curriculum rightly focuses on “how to do it,” but there’s also value in understanding “how capitalists learned how to do it.” Learning how and why business corporations, central banking, cost accounting, etc. came into being helps students learn that the context in which they will do business is not fixed in the stars.

Adam Smith, for instance, is an intellectual hero of mine, but students sometimes think he was an oracle who spoke universal truths. Like all of us Smith was intellectually limited by his particular moment in time. For example, he saw money as a rational, functional innovation which came into being when the division of labor created the need for a medium of exchange. Archeologists and anthropologists have shown that Smith had it wrong. Money and sometimes markets, too, came into being more as instruments of power and social control than of free exchange. Such knowledge can open our eyes to injustice in our time when money, still, is not just a store of value and a medium of exchange but also an instrument of power and social control.

In my course, for example, we consider the first human beings who saw glittering specks in dirt and smelted the ore into pure gold. They were likely driven by its sheer beauty and association with divinity. They didn’t know they were financial innovators creating a sort of “gold swan.”

It helps you stay open to new possibilities when you understand that, still today, people creating and experiencing change don’t understand its full meaning because they are limited to what is apparent in their own moment in time.

Historians traditionally place the emergence of capitalism in the 16th and 17th centuries. How does exploring capitalist practices before that period, and in non-Western societies, help students understand our current system?

Many Westerners don’t know that the Prophet of Islam – Muhammad – was a businessman, i.e. a trader and possibly a leader of caravans. Many Westerners also don’t know that, like the US today, Mecca was an increasingly unequal society. Despite his successful business career, Muhammad led a successful rebellion against the monopoly capitalists of Mecca.

Muhammad shared the ancient Christian and Jewish idea that charging interest injures the moral character of the lender. He thought a loan should be given in the spirit of generosity. Instead of charging interest and demanding collateral, lenders should earn their profit by sharing the borrower’s risk and taking an equity stake in the deal being financed. Muhammad’s view is gaining ground in some parts of the world today because the 20th-century demise of Western colonialism has given Islamic banking a chance to take root.

Or again, the Western notion is that self-interest drives entrepreneurship. But the Buddha’s doctrine of “no self” was a great spur to entrepreneurship along the ancient Silk Road where life and death were often the stakes of trade through barren and bandit-ridden deserts. Even today, the Buddha’s idea that “this suffering is not me” – and by extension, “failure is not me” – lowers the psychological stakes of risk-taking for some start-ups in South and East Asia.

The point is not that anyone, East or West, ancient or modern, is morally superior. The point is to avoid the moral arrogance of assuming that “my way is the only right way.” It’s important to recognize that other traditions also have moral lessons to teach. Even if you do not choose to adopt concepts from those alternative traditions, recognizing that realistic alternatives exist may open your mind to new possibilities.

As alumni from your course go into leadership positions across industries and sectors, what is the one lesson that you hope will stick with them throughout their careers?

The biggest lesson I hope students will take away from “The History and Ethics of Capitalism” is the shift from the ancient world’s virtue ethics (how do I become a more virtuous person) to the dominance today of utilitarian ethics (the greatest good for the greatest number, supposedly thanks to a free market made maximally efficient by self-interest).

Aristotle, the Buddha, Confucius, the Prophet Muhammad, Saint Thomas Aquinas, and most other ancient and medieval moralists were virtue ethicists. Adam Smith stood at a profound turning point in the history of capitalism and ethics. He tried unsuccessfully for a balance between ancient virtue and the onrush of modern utilitarianism, but perhaps it is still worth trying to reconcile these sometimes conflicting imperatives.

Capitalism’s modern moral discourse usually relies on the unfortunate notion of “values” which, as too often employed today, is either morally static and complacent, or foolishly optimistic about the ease of “adopting” new values. I hope that students don’t lose sight of Adam Smith’s and Aristotle’s idea that moral virtue, like profit, is a goal not a given, requiring constant practice.

Virtue sometimes compels and enables business leaders to discover winning new strategies which competitors cannot be bothered to find. To adapt Leo Durocher, I also hope students will recognize that not just the good guys but also the bad guys can finish last.

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