Entrepreneurship → Capitalism → Wealth

I am privileged from time to time to guest lecture to a class at the University of Missouri—Kansas City’s School of Law or its Institute for Entrepreneurship and Innovation at the Henry W. Bloch School of Management.  I also teach a law school class on the “Legal Life-Cycle of a High-Growth Technology and Life Sciences Venture.”  My students are uniformly bright, inquisitive and well-studied, and derive from a wide cross-section of this country’s melting pot.  They are “millennials” of course, and have a tendency toward concepts like wanting “social purpose” from their employers and jobs.

Here is a foundational point I nearly always make to my classes: entrepreneurship exploits and thrives on capitalism, which has as its primary purpose of creating wealth.  Unless a start-up company has this primary purpose, it is likely to eventually fail, and moreover it is unlikely to attract investment capital.

Surprisingly, after centuries of creating an economic system that makes this country the envy of the world, this seemingly simple fundamental point is now being re-litigated.  Perhaps the best example of the counter-argument is the “Statement on the Purpose of a Corporation” initially released by the Business Roundtable in August 2019.  This statement, signed by a wide range of CEO’s representing some of the world’s largest corporations, lists no less than five fundamental corporate purposes, and does not presume to mention profits until its last stated purpose, “Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate.”

Lest the sheer weight of signatories suggest a debate already concluded, today’s edition of The Wall Street Journal publishes the opinion piece of Andy Kessler, “To Serve the Public, Seek Profits.”  Mr. Kessler begins with a quote from a current candidate for the U.S. presidency, “It’s way past time we put an end to the era of shareholder capitalism.  Companies have responsibility to their workers, their community, to their country.”  Mr. Kessler responds with several key points:

• Capitalism and competition create wealth; other systems slop existing wealth around.
• Profits aren’t greedy. They are a critical price signal—a measure of how well a company is deploying capital and creating value for society.
• Capitalism works by creating wealth. Equality comes best through the creation of ever-cheaper goods and services, not handouts.

Mr. Kessler cites Yale Prof. William Nordhaus, winner of the 2018 Nobel Prize in Economics, “Only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers.”  Prof. Nordhaus has quantified this return as follows, “Innovators were able to capture about 4 percent of the total social surplus from innovation.”  According to Mr. Kessler, this “social surplus” creates “the improvements capitalism brings to common living standards.  That is societal wealth.”  In short, when a business focuses on creating wealth, the happy by product is more affordable goods and services, and the opportunity for shareholders to engage their own charitable purposes.  Hence, the betterment of society is the natural outcome of a well-executed enterprise purposed to create wealth for its owners.

The venerable Prof. Milton Friedman, winner of the 1976 Noble Prize in Economics, described as “the most influential economist of the second half of the 20th century . . . possibly of all of it” (The Economist, Nov. 23, 2006), explained these principles in his article, “The Social Responsibility of Business is to Increase its Profits” (The New York Times Magazine, Sept. 13, 1970).  Prof. Friedman argues that managers who claim their business is concerned primarily with whatever may be the contemporary favored social purposes “are unwitting puppets of the intellectual forces that have been undermining the basis of a free trade society. . .”  Instead, Prof. Friedman’s article concludes, “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”  (Emphasis added.)

Entrepreneurs who would pursue their inventive impulses using others’ capital, and lawyers who would advise them, do well to keep these foundational principles in focus.  As a practical matter, capitalism can be a ruthless taskmaster, squeezing every possible efficiency from a venture, forcing a laser focus on its business plan.  If the entrepreneur gazes elsewhere, the competitors will pass by in the fast lane.

Likewise, investors demand returns on their capital investment and will hold management accountable to their promises.  When management diverts attention and resources to non-productive or collateral purposes, the underlying rationale for investing in the company is diluted or undermined, and investors will become intolerant of the folly.

This is not to suggest that Aristotle’s ancient teachings on persuasion derived from personal character are rendered irrelevant, i.e. this is not a rationale for corrupt practices, nor that the ends justifies the means.  Effective execution of a business plan may very well require good wages and benefits to attract the best talent.  Or, polluting the nearby stream might result in business-destroying penalties, so that clean operations are more likely to lead to profits.  As Prof. Friedman concludes, a business has a duty to operate within the rules of the game, through open and free competition.

Yet, as much as some would seek to discredit the notion, the robust bottom line is indeed the scorecard of success.  Not simply to satisfy a craving for materiality, but because that is the means by which society has an opportunity to be made better for all.  Seemingly oxymoronic, a business that primarily emphasizes social purpose is less likely to achieve either profits or social purpose, while a business that primarily focuses on profitability is more likely to achieve both.