Is There a Market for “Conscious Capitalists”?

The iconic libertarian Milton Friedman once said “The great advances of civilization, whether in architecture or painting, in science or literature, in industry or agriculture, have never come from centralized government.”

Michael Strong, founder of innovative charter schools, and John Mackey, C.E.O. of Whole Foods, agree with Friedman, and have their own libertarian vision. They believe that entrepreneurs and “conscious capitalists,” not government, can solve the world’s problems, and they’ve founded an organization called Flow, Inc., to advance that vision.

In his new book Be the Solution, Strong describes the Flow vision and explains how liberated entrepreneurs in a free-market society can tackle such colossal problems as protecting the environment, eradicating poverty, and fixing the U.S. education system. Strong has agreed to answer a few of our questions about his new book, including his proposed wager with Columbia economist Jeffrey Sachs.

Question

What is Flow, Inc.?

Answer

A non-profit co-founded by John Mackey, C.E.O. of Whole Foods Market, and myself, dedicated to “Liberating the Entrepreneurial Spirit for Good.” We promote entrepreneurial solutions to world problems through diverse education programs, including writing, speaking, conferences, on-line communities, networks, partnerships, and coalitions. Our three major programs are Catalyzing Conscious Capitalism, Peace Through Commerce, and Accelerating Women Entrepreneurs.

John and I founded Flow because we shared a commitment to markets, on the one hand, and doing good, on the other. We found that our friends who were market advocates tended to ridicule our commitment to doing good, whereas our friends who were committed to doing good tended to be confused about the positive potential of markets.

Question

What is a conscious business? Does it produce profits for its shareholders?

Answer

Conscious businesses are for-profit businesses that act consciously rather than unconsciously or mechanically. They are committed to:

1. Acting out of a deeper purpose than mere profit maximization.

2. A stakeholder approach to value creation, in which the interests of customers, employees, suppliers, investors, the community, and the environment are harmonized and aligned to the greatest extent possible.

3. A sense of servant leadership, through which the management plays a role of steward to the company’s deeper purpose and stakeholder harmonization rather than personal self-aggrandizement.

As we enter an age in which more and more customers, employees, and investors choose to integrate meaning into their purchasing, employment decisions, and investment decisions, opportunities will open up for those conscious businesses that are most effective at integrating a deeper purpose into the D.N.A. of all of their operations. They will have more loyal customers willing to pay a premium price; a more loyal workforce willing to bring passion, energy, and creativity to work; and, as conscious financial markets develop more fully, investors who are more willing to focus on the long term.

Question

What is the Entrepreneurial Toolkit? What role can it play in lifting people out of poverty?

Answer

Just as a painter needs paints, paintbrushes, and a canvas, an entrepreneur needs key institutions, including property rights, rule of law, and the freedom to create. In order to plan a venture, in order to create new value through a new vision, one must be able to determine what resources one will be allowed to use (well-defined property rights), what the rules will be for using those resources (rule of law), and significant freedom with respect to how to organize and manage those resources (economic freedom). Nineteenth-century classical liberals were clear that these tools were the foundations of the entrepreneurial wealth-creation machine that had made the U.S. and Britain the first societies in the world in which the masses experienced a steadily improving standard of living.

A century of Marxist hostility to the foundations of capitalism has obscured the fact that throughout the developing world, property rights are insecure and ill-defined; the processes through which contracts are adjudicated is often obscure and unpredictable; and there are severe constraints on the extent to which entrepreneurs can create and manage their enterprises. The Fraser Institute’s Index of Economic Freedom shows that by objective measures (which include institutional measures of property rights, rule of law, as well as the freedom to create), the entire developing world has less economic freedom than Scandinavia.

For instance, in Mexico, as in the U.S., business documents must be notarized. But in Mexico, unlike in the U.S., notary publics are lawyers who charge $500 — $1000 to notarize each document. Due to this factor alone, only the wealthy can create and operate legal businesses. While there is plenty of entrepreneurship in Mexico, most of it is forcibly stuck in the informal sector, where the business owners have insecure title to their businesses, poor access to insurance and credit, little ability to settle contract disputes legally, etc. Entrepreneurial capitalism is only available to elites in Mexico and throughout the developing world. Hernando de Soto notes that currently when we sign a free-trade agreement with a Latin American nation, we are only signing that free trade agreement with 8 percent of the population, because only 8 percent have access to the legal system due to regulatory obstacles.

By contrast, it is free to create a legal business in Denmark. While Scandinavian nations are often described as “socialist,” they are more accurately described as “free-market welfare states.” Socialism means government control of the economy; but Scandinavian nations, although they have enormous safety nets, in other respects are among the most free-market nations on earth.

Access to the Entrepreneur’s Toolkit leads to widespread entrepreneurial wealth creation; widespread entrepreneurial wealth creation leads to the elimination of mass poverty. In short, if all nations were as free market as, say, Denmark, in a few decades we would see “the end of poverty.”

Question

You disagree with Jeffrey Sachs on the subject of foreign aid and development. Can you tell us about the wager you proposed in your book?

Answer

Fifteen of the 20 lowest-ranked nations on the Fraser Index are African. Until millions of African entrepreneurs have an opportunity to create and grow legal businesses, Africa will remain poor regardless of how much foreign aid is given to African governments. No nation on earth has ever become wealthy without high levels of economic freedom (China as a nation has little economic freedom, but the Special Economic Zones that are driving the growth are modeled after Hong Kong, the most economically free entity in the world).

G.D.P. per capita correlates with levels of economic freedom, and increasing levels of economic freedom increase average rates of long-term economic growth. There is little evidence that government-to-government foreign aid increases average rates of economic growth.

In order to get Sachs to acknowledge this, I propose that we compare G.D.P. growth of three sets of 20 nations, 20 years from now:

Sachs 1: The 20 nations that have received the most government-to-government foreign aid as a percentage of per capita G.D.P.

Sachs 2: The 20 nations that have experienced the greatest percentage growth in government (in honor of Sachs’s claim that large government does not inhibit growth).

Strong: The 20 nations that have experienced the greatest increases in economic freedom as measured by the Fraser Economic Freedom Index.

Foreign aid may do some good (occasionally) or it may do some harm (usually), but no amount of aid will ever create a dynamic economy in the absence of the Entrepreneur’s Toolkit. Due to Sachs’s prominence in the poverty alleviation debate, until he acknowledges the role of economic freedom in alleviating poverty, he should be regarded as the leading cause of poverty in 2025.

Question

In your book, you express doubts that the global warming problem can be solved by the creation of a new pro-environment value system. What are your suggestions for conserving our natural resources and addressing climate change?

Answer

Education, exhortation, and other forms of creating pro-environment value systems help by means of creating a green consumer base that, through purchasing green, drives more green innovations for the future than would otherwise be the case. That said, in order to solve more substantial environmental problems, we need to change the legal environment within which entrepreneurs start and grow companies so that they can solve more problems.

The three most important legal changes are:

1. Eliminate environmentally harmful subsidies and regulations. Worldwatch estimates that every American family could get a $2,000 tax cut by means of eliminating environmentally harmful subsidies.

2. A green tax shift, shifting taxes away from work, savings, and investment, and toward taxing environmental harms. This will allow more green entrepreneurs to become more profitable more quickly, while also penalizing environmentally harmful industry. Al Gore‘s proposal to eliminate all payroll taxes in exchange for revenue-neutral carbon taxes is the most famous example of such a green tax shift. (Strategically, it would be better to emphasize the benefits for business and employment growth through eliminating payroll taxes rather than to harp on climate).

3. Environmental trusts, in which key ecosystems are taken from government control and put in the hands of trusts with a legal responsibility to protect the environment (see Peter Barnes‘s Capitalism 3.0).

While these approaches may not have the visceral appeal of moralizing, they are likely to have a more substantial long-term impact because they release entrepreneurial creativity on behalf of the environment.

Question

What is the Flow vision for our educational system?

Answer

As an educational innovator who has created several highly successful schools, including a charter high school named the 36th best public school in the U.S., I found when I worked in public schools that even when I created a successful program, a new superintendent or school board could dismantle it. So the first priority is to empower educational innovators to form new organizations that are built to last by allowing them to create organizations that are not governed by school-board politics.

The second obstacle to creating great educational programs was the regulatory obstacle that even charter schools face. My specialty was developing students’ abilities to think for themselves while increasing their measurable academic abilities as measured by A.P. and S.A.T. exams. In order to achieve these goals, I needed to focus more on students’ intellectual habits and attitudes than on narrowly defined curricula. I found myself focusing on changing classroom culture and, when I created schools, on creating a distinctively intellectual culture at the new schools (even among student populations that were not originally intellectual). In order to transform student culture, I needed more autonomy with respect to school creation than was allowed by charter-school law.

Thus I’ve become a believer in liberating educational entrepreneurs as much as possible, through minimally regulated charter schools, educational vouchers, and tuition tax credits. Ideally we would create a separation of school and state and raise the incomes of the poor through the Negative Income Tax. Based on what we are already spending, Edgar Browning estimates that we could give each family of four below the poverty line more than $100,000 per year — more than enough to afford private schools.

The ultimate goal is to create a “Silicon Valley of Education,” an entrepreneurial educational industry that does for human development what Silicon Valley did for the I.T. industry.

Question

In recent months, both conservative and liberal politicians and economists have blamed deregulation of the financial system for the current financial crisis and called for a new regulatory framework. As a libertarian, how do you feel about regulation of our financial system?

Answer

Tyler Cowen has written that the issue is not more or less regulation, but rather appropriate regulation. Because of the realities of the public choice process, in which special interests always insinuate their influence over time, I’m not confident that “this time we will get it right” with respect to financial regulation. Thus while the new spate of financial regulations may or may not do some good now, they will most likely be corrupted again over time.

Moreover, the notion that Bush was a big deregulator is false. Contrary to public perception, Bush increased government control of the economy. The Fraser Index shows that economic freedom in the U.S. began to increase under Reagan then peaked in 2000 after eight years of Clinton. Since 2000, economic freedom in the U.S. has decreased, such that the U.S. had less economic freedom in 2006 (the latest year for which data is available) than in 1980; we had more economic freedom under Carter than we did under Bush. The handful of other nations that lost economic freedom during that period includes Zimbabwe, Venezuela, and Myanmar.

The deeper problem is government-sponsored moral hazard; Arnold Kling refers to the “Fannie Mae-Freddie Mac crisis.” (Nobel Laureate Vernon Smith and Steven Gjerstad explain exactly how the mortgage crisis triggered a financial meltdown). The worst aspect of the government takeovers and bailouts is that we are setting ourselves up for government-sponsored moral hazard on an even greater scale in the future. Moral hazard essentially subsidizes a gambling economy rather than a value-creation economy. Some subset of financiers will always discover that they can earn returns that are disproportionate to the risk of the underlying asset by means of relying on investor perception of government protection and other government distortions of the marketplace. In its worst form, this is government-sponsored casino capitalism, in which reckless individuals earn extraordinary salaries and bonuses while the average American taxpayer is stuck with the bill.

The solution to market failure is often more markets; in addition to privatizing rather than nationalizing, I’d like to see legalized prediction markets, so that more information on price trends is available to more people early on, thus reducing the scale and cost of the speculative bubbles.

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  1. Bobby G says:

    Now that I’ve read it:

    Fantastic. This article covers many different, diverse areas of public finance and I agree with almost all of it. I’ve just become a fan of Michael Strong.

    I have been against foreign aid for a while and this has provided good insight the furthers that notion. I’ll have to check out Ms. Moyo’s book on the subject, it looks very interesting.

    I’ve long been in favor of deregulating education, and am now intrigued to learn more about charter schools and their operations.

    Lastly, how refreshing it is to hear someone talk about the financial meltdown and get the facts right. I’d be even harsher in the critique of mainstream media’s explanation for the meltdown, but I am in league 100% with the danger of the moral crisis that we are on track to create.

    Someone forward this to CNN.

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  2. jimmyc says:

    So you want to take the “state” out of socialism and replace it with “entrepreneurs”. Is this market socialism?

    The backdrop of your ideas are that as the population continues to grow, we need to be thinking about maximizing individual, community and economic development in order for our society to maximize both individual and community benefit not simply individual profit. Great ideas.

    Can these ideas survive in the face of “maximize profit” capitalism?

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  3. Tracy W says:

    I appreciate Strong’s sentiments, but the proposed wager seems a bit unfair. If foreign aid flows to countries because they are poor, then the wager would suffer from serious selection bias. Moreover, certain factors (e.g. political stability) probably lead both to economic growth and improved economic freedoms.

    Freakonomics economists, you know this!

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  4. Joe D says:

    Friedman and other hard-core libertarians can make statements like these by picking and choosing what are the “great advances of civilization” (or what constitutes “centralized government”). I’ve had similarly frustrating debates with philosophy students whose definitions didn’t always match my “common sense” ones.

    I provide only two examples. The Roman Empire’s system of roads, created to allow rapid movement of troops, had the cultural benefit of rapid (for the time) movement of ideas. The U.S.’s system of free public schools require the support of taxes and some central governing body to manage it (or its pieces, the individual school districts) gives us a far more literate population than we would have without it (how much more remains moot).

    Did the ideas themselves originate with some visionary individual? Undoubtedly, but the implementation was impossible without government.

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  5. Griffin says:

    So it was self-interested businessmen all along? And not saints? Or inventors and scientists? Or statesmen?

    The idolization of business leaders began a few years ago. But … how realistic – or even sane – is that?

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  6. Sven L says:

    Didn’t the internet come from centralized government? It’s a pretty significant advancement of civilization

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  7. econ2econ says:

    Excellent post! I’m very interested in what else Mr. Strong has to say. I’ll go check out his book…

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  8. the Gooch says:

    “…throughout the developing world, property rights are insecure and ill-defined; the processes through which contracts are adjudicated is often obscure and unpredictable…”

    So, the GM bondholders all reside in the developing world? And banks that took the King’s shilling through TARP?

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