Woke capitalism versus enlightened capitalism

Whilst critics of ESG call it woke capitalism, a British trial of the four-day week shows that so-called work policies could also be called enlightened capitalism.

When Elon Musk started laying staff off at Twitter, social media polarisation created one view one might describe as anti-woke, which supported him and a second view that this was creating problems for the future. Musk’s legions of anti-woke fans suggested that the redundancies were needed since Twitter’s performance appeared unaffected. The other tribe, many of whom were once Musk fans, that was back when Musk was perceived as an entrepreneur fighting climate change, saw the Twitter redundancies as a sure way to reduce Twitter’s long-term ability to be successful.

Those two contrasting views on Twitter redundancies illustrate a wider point. The woke capitalism view of ESG sees any attempts to enforce a more assertive environmental or social policy on a company as interfering with the extraordinary efficiency of capitalism. The other point of view favours something that one might call enlightened capitalism.

Enlightened capitalism

What is enlightened capitalism? It can manifest itself in three ways.

Firstly, enlightened capitalism focuses less on quarterly accounting and takes a longer-term view. There is nothing remotely anti-capitalist about this. Warren Buffett and Jeff Bezos emphasise the importance of long-term planning and worrying less about the next quarter.

Secondly, enlightened capitalism puts more emphasis on externalities. Again, there is nothing anti-capitalist about this. Indeed,  economics 101 has a lot to say about externalities, such as a polluter imposing a cost on the environment that is not reflected in the price of the goods it sells. This is an example of where regulation is required because in a pure market economy, with no oversight, externalities can ultimately create economic collapse.

The third point about enlightened capitalism is more subtle; it takes a kind of big-picture view of the world. This third point builds on the idea that individuals acting in their best interest can create catastrophic results if other individuals behave similarly. To illustrate this consider sub-prime mortgage securitisation. It stood to reason that if you lent money, you could reduce your risk if you split every loan into small components and sold those to other lenders. If a few loans went bad, it wouldn’t matter as you had reduced your risk. As a result, you could afford to make more risky but profitable loans. But the advocates of this model overlooked that other money lenders also applied this approach; they also made more risky loans. On a one-on-one basis, mortgage securitisation seemed prudent, but when applied across the economy, the result was a systemic risk which eventually caused the 2008 crash.

There are many other examples of this big-picture view of capitalism. In the late 1990s, the Black Scholes model seemed to have created a foolproof way to make money for its investors. Indeed the inventors of the model won the Nobel Prize. But the flaw in the model is that it ceases to work if multiple investors apply a similar approach. Black Scholes was fine when applied in isolation but created a global financial crisis in 1998 when other financial institutions applied a similar approach.

Here is one more example looking back at history. The academic researcher James Bessen, for example, argues that during the earlier stages of the first industrial revolution, while productivity rose, wages did not rise in tandem, contrary to what economic theory might predict. It seems that each factory that applied new technology was quite different from all other factories. They had their unique way of operating, and as a result, workers found that the skills they developed at one factory were not transferable — workers were taken on with little experience and swiftly trained, meaning that the employer had the upper hand in wage negotiations. This changed after trade associations created better practices, industry became more homogeneous, and skills learnt at one factory became relevant to the next. Greater competition for labour resulted, and wages rose — but while employers might have lost their monopolistic power over wages, they were largely better off — productivity rose, and profits increased. More to the point, as wages rose across the economy, the market for the goods that factory owners produced also increased in size. In short, a more enlightened labour practice led to greater profitability. See

Amazon.co.uk

Survival capitalism

But the above is all very well, but not all businesses can afford to focus on the long term at the expense of short-term priorities. They have to focus on the next few months or go bust. Maybe Musk made those redundancies at Twitter because he had little choice. In this case, long-term thinking becomes a luxury only those organisations with deep pockets can afford.

The externalities argument is a different matter. Under capitalism, if companies can not make their products at a profit, they should go bust, and if government regulation forces them to reflect externalities and, as a result, they can no longer operate, then that is capitalism.

As for the third point, some might argue it is so vague and theoretical that it has limited relevance to the real world.

Pragmatic capitalism

But pragmatic capitalism and enlightenment capitalism are not necessarily different. For example, a pragmatist might look at climate change and conclude that future regulation is inevitable, and so it is best to, as it were, get in there first, creating a first-mover advantage ahead of the time when regulation makes it compulsory to apply certain procedures.

A pragmatist might look at the jobs market and demographic changes and conclude that labour shortages are here to stay and that it is better to apply certain social policies to be more competitive in the labour market.

Woke capitalism versus enlightened capitalism

In the US, as this FT video explains, ESG is seen by some as woke capitalism.  Fox News host Tucker Carlson calls ESG a destructive force pressurising governments to sabotage their own economies.”

Under pressure from activists, Disney nailed its colours to the ESG mast and raised the wrath of Florida’s Governor Ron Desantis in the process. In Texas, the state government has banned state agencies from dealing with financial firms it says have boycotted companies that sell fossil fuels or guns.

But then take the concept of the four-day week. Can you think of a more woke idea? And yet, the results of a trial in the UK show that out of the 61 companies that took part in the trial, 56 plan to continue operating a four-day week. The study found a significant reduction in stress and illness amongst staff, with no discernible fall in output.

It is that last bit that is telling. Clearly, a four-day week is great for staff, but the study shows that creating a more staff-friendly environment does not impact profitability. Indeed, the study showed a 1.4 per cent increase in revenue.

But there is a wider point. Companies that operate a four-day week could save money on heating and maybe ultimately on office rent. And, of course, they become immensely more competitive in the labour market,

The four-day week isn’t necessarily a core ESG  principle, but there is an overlap.

Woke literally means awake. If woke capitalism means awake to new ideas to become more successful, and if enlightened capitalism affords an advantage to companies that adopt this approach over those that apply a more traditional approach to capitalism, then isn’t ESG not so much a destructive force as a force that could construct long term success?