Returning from a trip to Europe (the excuse for no posts recently), I read a column in the Wall Street Journal’s Europe edition by Lady Lynn Rothschild, CEO of E.L. Rothschild and Co-founder of the Coalition for Inclusive Capitalism that I must comment on. It was entitled: “How capitalists can do well while doing good” and made the argument that investors can make capitalism “inclusive” by focusing not only on maximizing financial returns but also on environmental, social and governance (ESG) metrics. Citing a report from Oxford University, Lady Rothschild argues that incorporating ESG considerations in investment decisions would improve, not worsen, long-term financial returns, thus allowing capitalists to help society—“do good”—while pursuing their self-interest—“doing well.”
Lady Rothschild suggests that the ESG principles are instinctively attractive to people: “Everyone would love it if we could stop climate change, if workers were treated well, or if companies would stop destabilizing financial markets for the sake of short-term profit.” Her argument is that investors (such as public pension funds like CALPERS and sovereign-wealth (state-owned) funds of countries like Norway and New Zealand) do reward companies that incorporate the ESG principles, and doing so is therefore in the companies’ (their shareholders’) long-term self-interest.
While Lady Rothschild’s arguments may appeal to many, they are utterly mistaken. Her fundamental error is that she does not understand capitalism. In Ayn Rand’s definition, “capitalism is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned.”
Such a system does not currently exist anywhere—mixed economies where governments violate the individual rights of their citizens and own property (such as sovereign-wealth funds) prevail—but even if it did, it would be wrong to argue that varieties of it, such as “inclusive” and “non-inclusive” capitalism, exist. Capitalism merely is, albeit currently it exists only as an ideal. To label it as “inclusive” is meaningless, because under capitalism, everybody has the same individual rights to life, liberty, property, and the pursuit of happiness, and everybody’s rights are equally protected by the government. Capitalism does not “exclude” anybody.
Under capitalism everyone chooses how much productive effort to exert—and they are entitled to keep the fruits of their efforts. In a capitalist system the government doesn’t “redistribute” income from the more productive to the less productive. Therefore, capitalism incentivizes productiveness and wealth creation, making all the traders in the system better off, regardless of their efforts. Those truly unable (as opposed to unwilling) to be productive would need to depend on private charity (which the historical evidence suggests flourishes when government social programs are absent).
By arguing that investors and companies should concern themselves with ESG metrics and not only with financial returns, Lady Rothschild implies that under capitalism there is a conflict between profits and pollution, treating employees well, and “destabilizing” financial markets. This further indicates misunderstanding of capitalism. The lack of evidence for man-made climate change aside, capitalism prevents pollution because all property is privately owned and property rights are protected by the government. It would not be in the interest of a company or an individual to damage others’ property (or the airspace above it or ground water underneath it) due to the penalties involved.
Capitalism is a system of competition, where those companies offering the best value to customers will be the winners in terms of long-term profitability. Companies depend on their employees to deliver value to their customers—and only those companies treating their employees well can do so continually. Capitalism encourages treating employees well, trading value for value: compensation, recognition, and training in exchange for their productive input.
The idea that capitalism encourages companies to “destabilize financial markets for the sake of short-term profit” is Lady Rothschild’s final confusion. It is not companies competing in free markets—under capitalism—that destabilize markets; government regulation does. For example, according to widely held—but mistaken—belief, it was the “greed” of companies seeking short-term profits that caused the 2008 financial crisis, when in fact it was government regulation and intervention, especially in the financial sector, that caused the meltdown in the United States and the rest of the world (for in-depth explanation, see John Allison’s or Yaron Brook and Don Watkins’ books).
Instead of joining the Coalition for Inclusive Capitalism, companies and investors would do much better by advocating true, laissez-faire capitalism: individual rights and private ownership—with the consequence of more wealth creation, less pollution, and more overall well-being and flourishing for all.