Saturday, October 08, 2005

Free-range technocracy

In a fascinating Reason colloquy, Whole Foods CEO John Mackey says Milton Friedman wasn't thinking expansively enough 35 years ago when he penned "The Social Responsibility of Business Is to Increase Its Profits." Mackey argues that from now on, successful companies will have to acknowledge the "humanitarian" dimension of capitalism, incorporating charitable contributions (presumably directed to the local community) as part of the business model.

Cypress Semiconductor CEO T.J. Rodgers counters that Mackey's little more than a Marxist decked out in libertarian pleather. Sure, companies can be good corporate citizens and help charitable projects. But they must keep shareholder value their top priority, or more-efficient competitors will drive them out of business.

Friedman plays peacemaker, noting that in a diverse marketplace, it's possible for corporations to succeed by selling their conscience, if you like -- so long as they also serve their customers, employees and shareholders well.

Friedman has it right, but he lets Mackey, who claims to be a free-market libertarian, off too easily. Had Mackey adopted the, say, Maoist defense of his business philosophy -- let a thousand flowers bloom -- he'd have convinced me. Problem is, Mackey becomes messianic in his message.

The ideas I’m articulating result in a more robust business model than the profit-maximization model that it competes against, because they encourage and tap into more powerful motivations than self-interest alone. These ideas will triumph over time, not by persuading intellectuals and economists through argument but by winning the competitive test of the marketplace. Someday businesses like Whole Foods, which adhere to a stakeholder model of deeper business purpose, will dominate the economic landscape. Wait and see.
This isn't free-market libertarianism; it's central planning garnished with yogurt and granola. When Mackey argues in the inevitability of his model -- the one best way -- he shows a profound misunderstanding of the dynamic nature of free markets, where no one can predict the long-term structure of a corporate sector, let alone a global economy.

In his own field, Whole Foods thrives alongside Costco and Safeway, and often cater to the same customers because each type of store offers something different -- in the variety of products, pricing and personalized service. Beyond that, though, he's using his relatively brief success in a narrow niche to predict how entrepeneurs must behave if they hope to succeed decades from now.

Whole Foods may have a license to print money today. But look at how its success has forced more-traditional stores to upgrade their offerings; compare the meat and produce sections of any modern supermarket in 2005 with the same store a decade ago. Remember the narrow aisles, the limited selection, the unattractive displays?

Whole Foods' profitability has also spawned (and grown) new local, regional and national competitors -- Trader Joe's, Bristol Farms, Wild Oats. Over time, this competition could trim Whole Foods' profit margins, making Mackey's new vision hardly seem inevitable.

Before making bold predictions about the future of capitalism, I'd recommend reading not just Adam Smith but also Frederich von Hayek ... not to mention Virginia Postrel.

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