4 Ways Government Can Help Create Shared Value

Last week I wrote about Creating Shared Value. In that post, I pointed to a Harvard Business Review article by Michael Porter and Mark Kramer. If you haven’t read both my post and the Michael Porter piece, please do so now.  I’ll wait.

Now that you’re up to date, let me add the Tea Party angle to this. 

Though Porter did not dwell on government’s role in Creating Shared Value (CSV), he did point out that government must reform for CSV to succeed.  Here are a few of the Tea Party reforms necessary if Porter’s (and Whole Foods CEO John Mackey’s) vision is to succeed:

Stop Vilifying Business:  Both parties fail to defend business when business is unfairly attacked.  Instead, politicians tend to jump on the populist bandwagon, piling on companies and industries. One example:  the regulation of cable television in the early 1990s.  Responding to false claims that cable companies were gouging customers, Congress stepped in and imposed regulations that caused cable rates to increase faster and customer satisfaction to tumble. 

Stop Picking Winners:  General Motors, Chrysler, Bank of America, Citigroup, and dozens of other banks and businesses should have failed.  Only illegal and inappropriate government interference in the market saved these companies, transferring financial responsibility from the owners to the tax payers.  Regardless of future performance, our economy is worse off than it would have been had government stayed out of the mess.  Moreover, innovation and ideas that might have improved the world and increased sustainability are lost because government’s clunky hand manipulated the markets.

Stop Creating Entitlements: Welfare reform gave us a few years of federal budget surplus. With Barack Obama’s historical and dangerous deficits, the last thing we needed was a new entitlement. But Obama and the 111th Congress gave us just that with health control.  John Mackey of Whole Foods pointed out a system that many employers offer that reduces healthcare costs and makes good insurance affordable for everyone.  Were affordable health insurance Obama’s actual goal, he would have embraced the high deductible solution. Instead, he outlawed it.  Government must eliminate all entitlements, not make new ones, if CSV is to succeed.

Reform the Tax Code:  Most of the our favorite tax breaks—designed to change behavior—will go away in order to pay off massive deficits brought about by entitlements and political handouts.  It’s time, then, to flatten out the tax code.  That means establishing in a tax-free income level (say $20,000), and a tax rate (say 18 percent).  The new 1040 looks like this:

Income:________ – $20,000 = _____________ * 0.18 = Tax Due ______________

 

Creating Shared Value is a business strategy.  Fully embraced, it offers the possibility of remarkable growth for companies, communities, and economies.  It rejects the notion of trade-offs, like clean air or full employment. Instead, it means clean air because of  full employment.

Companies can reach CSV only if government gets out of their way.  And if companies get out of their own ways.  But Michael Porter has advanced a strong argument for the later.  Now it’s time for the Tea Party to encourage government to do its part.

How else can government help advance Creating Shared Value by reducing its size, scope, and cost?  Leave your thoughts below in the comments.

What We Learned from Milton Friedman

I am a big fan of Milton Friedman.  I’m also becoming a big fan of Creating Shared Value.  Some believe the two values are inconsistent, but I disagree.

milton-friedman-300x202In 2005, Reason Magazine posted an online debate between Friedman and Whole Foods Market CEO John Mackey.  The debate coincided with the 35th anniversary of Friedmans’ famous The New York Times Magazine article entitled: : "The Social Responsibility of Business Is to Increase Its Profits." 

Now, 2005 was before Mr. Mackey became the darling of the tea party because of his defense of privatized medicine in 2009.  At the time, I’m sure, free marketers took sides with Friedman. 

But in that debate, Mackey makes a compelling case for businesses understanding the long-term effects of their operations and decisions—and for learning how to articulate the benefits of capitalism to society:

Both capitalism and corporations are misunderstood, mistrusted, and disliked around the world because of statements like Friedman's on social responsibility. His comment is used by the enemies of capitalism to argue that capitalism is greedy, selfish, and uncaring. It is right up there with William Vanderbilt's "the public be damned" and former G.M. Chairman Charlie Wilson's declaration that "what's good for the country is good for General Motors, and vice versa." If we are truly interested in spreading capitalism throughout the world (I certainly am), we need to do a better job marketing it. I believe if economists and business people consistently communicated and acted on my message that "the enlightened corporation should try to create value for all of its constituencies," we would see most of the resistance to capitalism disappear.

Today, I have to admit, I agree with Mackey.  Milton Friedman’s 1970 article that the only social responsibility of the corporation is to maximize profits was not wrong.  It was poorly expressed. As Mackey points out, Friedman’s words have been (ab)used by leftists ever since—usually by leftists who’ve never read the article. 

Earlier in the debate, Mackey pointed out that Adam Smith’s less famous work focused, not on maximizing profits, but on maximizing value:

[E]conomists would be well served to read Smith's other great book, The Theory of Moral Sentiments. There he explains that human nature isn't just about self-interest. It also includes sympathy, empathy, friendship, love, and the desire for social approval. As motives for human behavior, these are at least as important as self-interest. [hyperlink added]

We’ve learned many great ideas from Friedman, including the ridiculous cost of government hidden in a 32 cent pencil.  Free to Choose was the most important book on economics I read in high school.  I’m sure it was for many others, too. 

We also learned the importance of messaging from Dr. Friedman  by way of John Mackey.  We owe both men a debt of gratitude.  And we owe the great free market system our vigilance in promoting the political system that advanced humanity more than any.  By creating shared value, corporations keep the engine of liberty alive. 

On Friday, I’ll write more on the idea of Creating Shared Value.