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Does capitalism need an extreme makeover?
In an era defined by a burgeoning gap between the rich and the poor, stagnant wages and faltering support for free markets among younger voters, the question has been raised with increasing regularity — and defies easy answers.
Britain's recent vote to extricate itself from the European Union, as well as the protectionist sentiment embraced by both presumptive major party U.S. presidential nominees, have been interpreted by some as an erosion of a postwar economic consensus that once embraced the virtues of globalization. In the midst of a surging tide of populism, one author has come up with a solution: force companies to adopt socially sustainable solutions — and grade them on it using a tailored balance sheet that awards credits and demerits.
A balance sheet that elevates social responsibility over profit is part of the "Common Good Economy" (CGE) — the brainchild of Austrian author Christian Felber. He explained that his program is intended to blunt the sharp edges of a free market system that has seen a surge in extreme poverty, environmental degradation and other negatives that erode public support for capitalism.
"Populism is getting stronger, inequality is exploding and democracy is eroding, and ... relationships and feeling of community is getting lost," a state of affairs for which he faulted both governments and businesses, Felber told CNBC in a recent interview.
The "invisible hand" of the free markets popularized by Adam Smith in his seminal tome "An Inquiry into the Nature and Causes of the Wealth of Nations" has become antiquated, Felber argued, and simply "doesn't work. The Common Good balance sheet is a way to see that Adam Smith's dream comes true," he added.
The CGE's approach has already been adopted by more than 400 companies, most of them in Europe, Felber said. Its approach is similar to the Global Reporting Initiative (GRI) whose standard links business activity to sustainability, and is used by Microsoft and PepsiCo, among other giants.
"The common good will improve relationships, diminish inequality and improve the environment because it's part of a company's goal and part of an economy's goal," Felber said. He added that applying CGE could result in the "fundamental reorientation" of the world's economy.
"The proposal is to strive directly for the good of the economy ... the common good, the welfare of all," he said. "It means business and investment and economy as a whole are aimed at improving" a range of socially beneficial outcomes, he said.
Free trade, the chief exponent of laissez-faire capitalism, has come under withering scrutiny as agreements between nations have fallen short of their goals to create more prosperity. A recent poll by YouGov showed that a mere 31 percent of Americans saw free trade as good for the country, although nearly half of millennials hold a favorable view of the system. Felber said that waning support for liberalized trade and markets was a function of the perception that companies are reaping big profits without tangible benefits for the rest of the population.
On its face, the common good philosophy tries to create a happy medium between capitalism and statist policies that have ended in failure historically. The CGE approach creates a bigger role for government oversight, while acknowledging that a market-based approach represents the best chance of creating wealth and whittling away at extreme economic disparities.
"In the current economy we are mixing up goals and means. Means are capital and profit, they are indispensable means, but they are not the goal," the author told CNBC, adding that a common good economy "uses the means but focuses on the goal" of enriching the lives, relationships and living standards of all.
Felber's Common Good Economy creates five distinct categories — human dignity, social justice, ecological sustainability, cooperation and transparency — that serve as a guide for investors.
The system assigns points to a private company for fulfilling each sustainable value. It also takes points away based on whether a business undermines principles of fair pay, transparency, environmental sustainability and moving jobs overseas.
Conversely, it also means CGE's system would penalize companies in carbon-intensive industries like energy production — or even nonenergy companies where CEOs are compensated too much.
"Of course you call that subjective, but it holds true for every single law," Felber said. "Even the financial balance sheet is subjective."
CGE creates a mixture of legal, profit and taxation incentives that basically mean the most virtuous companies would get priority terms in operational financing and borrowing costs, Felber explained to CNBC. Ultimately, Felber's goal is to make it compulsory for companies to weigh considerations other than the bottom line, thus working in the overall interest of the broader society.
"We are asking (CGE) to become obligatory, and have legal consequences. If you do a sustainability report ... the effect will be very little," he said. "But if the result ... leads to different tax rates and trades and priority in public procurement, then it makes a difference."