Defending the Morality of Capitalism
By John Mackey, June 24, 2011 | More posts by John Mackey
This interview was conducted by Tom G. Palmer, the Executive Vice President of International Affairs at the Atlas Network. Tom previously served as Vice President for International Programs at the Cato Institute and Director of the Center for Promotion of Human Rights. A slightly shorter, abridged version of this interview will appear in the upcoming book, The Morality of Capitalism.
Palmer: John, you’re something of a rarity in the business world: an entrepreneur who’s unashamed to defend the morality of capitalism. You’re also known for saying that self-interest isn’t enough for capitalism. What do you mean by that?
Mackey: Resting everything on self-interest is relying on a very incomplete theory of human nature. It reminds me of college debates with people who tried to argue that everything you do logically has to come from self-interest or you wouldn’t do it. That position is irrefutable, and ultimately nonsense, since even if you did things that weren’t in your self-interest, they would still say that it was in your self-interest or you wouldn’t do it. So it’s a circular argument.
Palmer: In what way do you think that other motivations beyond self-interest are important for capitalism?
Mackey: I just don’t like the question, because people have different definitions of self-interest and you end up talking past each other frequently when you talk about this subject, which is why I was mentioning the sophomoric type of discussion you have in college about everything being self interest. What I’m suggesting is that human beings are complex and we have many motivations, of which self-interest is one, but hardly the only one. We’re motivated by many things that we care about, that include, but are not limited to, our self-interest. I think that in some ways the libertarian movement – possibly due to the combined influence of Ayn Rand and many economists – has gotten to a kind of ideological dead end that I don’t think does justice to business or capitalism or human nature. If you think about it, the time in our lives when we’re probably the most self-interested is when we’re young and emotionally immature. Most children and adolescents are highly self-involved or narcissistic. They’re acting from their self-interest, as they perceive it. As we mature and we grow, we become more capable of empathy and compassion and love and a fuller range of human emotions. People do things for lots of reasons. A false dichotomy is often set up between self-interest, or selfishness, and altruism. To me it is a false dichotomy, because we’re obviously both. We are self-interested, but we’re not just self-interested. We also care about other people. We usually care a great deal about the well being of our families. We usually care about our communities and the larger society that we live in. We can also care about the well being of animals and our larger environment. We have ideals that motivate us to try to make the world a better place. By a strict definition, they would seem to contradict self-interest, unless you get back into the circular argument that everything you care about and want to do is self-interest. So I don’t think self-interest is enough. I don’t think calling every act self-interested is a good theory of human nature. I think that capitalism and business should fully reflect the complexity of human nature. I also think it does great damage to the “brands” of business and capitalism, because it allows the enemies of capitalism and business to portray them as selfish and greedy and exploitative. That really bothers me, Tom, because capitalism and business are the greatest forces for good in the world. It’s been that way for at least the last two hundred years … and they don’t get sufficient credit for the amazing value that they have created.
Palmer: What besides pursuing self-interest, or profit, does a business do?
Mackey: Putting it generally, successful businesses create value. The beautiful thing about capitalism is that it’s ultimately based on voluntary exchange for mutual benefit. Take a business like Whole Food Market, for example: we create value for our customers through the goods and services we provide for them. They don’t have to trade with us; they do it because they want to, because they think it’s in their interest to do so. So we’re creating value for them. We create value for the people that work for us: our team members. None of them are slaves. They are all voluntarily working because they feel like it’s a job they want to do; the pay is satisfactory; they derive many benefits from working at Whole Foods, psychic as well as monetary. So we’re creating value for them. We’re creating value for our investors, because, well, our market cap’s over $10 billion dollars and we started at nothing! So we’ve created over $10 billion dollars worth of value for our investors over the past thirty plus years. None of our stockholders are forced to own our stock. They all do so voluntarily because they believe we’re creating value for them. We’re creating value for our suppliers, who trade with our business. I’ve watched them over the years, watched their businesses grow, watched them flourish – and that’s all proceeded voluntarily. They help make Whole Foods better and we help make them better.
Palmer: You label your philosophy “conscious capitalism.” What do you mean by that?
Mackey: We use that term to distinguish it from all those other labels that generate a lot of confusion when they’re all lumped together, like “corporate social responsibility,” or Bill Gates’s “creative capitalism,” or “sustainable capitalism.” We have a very clear definition of conscious capitalism, based on four principles. The first principle is that business has the potential to have a higher purpose that may include making money, but is not restricted to it. So every business has the potential for a higher purpose. And if you think about it, all the other professions in our society are motivated by purpose, beyond a narrow interpretation of purpose as restricted to maximizing profits. Doctors are some of the highest paid people in our society and yet doctors have a purpose – to heal people – and that’s the professional ethics taught in medical school. That’s not to say that there are no greedy doctors out there, but at least many of the doctors I’ve known do genuinely care about their patients and try to heal them when they’re sick. Teachers try to educate people and architects design buildings and lawyers — once you’ve taken all the lawyer jokes out of the equation — are attempting to promote justice and fairness in our society. Every profession has a purpose beyond maximizing profits and so does business. Whole Foods is a grocer, so we’re selling high quality natural and organic foods for people and helping them to live healthier and longer lives.
Palmer: And the second principle?
Mackey: The second principle of conscious capitalism is the stakeholder principle, which I alluded to earlier, which is that you should think about the different stakeholders for which a business creates value and who can impact a business. You should think about the complexity of your business in the attempt to create value for all of these interdependent stakeholders — customers, employees, suppliers, investors, and communities. The third principle is that a business needs leaders who are highly ethical and who put the purpose of the business first. They attempt to serve that purpose and they attempt to follow the stakeholder principle. So they have to walk the talk of the business. And the fourth principle of conscious capitalism is that you have to create a culture that supports purpose, stakeholders, and leadership, so that it all fits together.
Palmer: Do those principles motivate you personally when you get up in the morning? Do you say “I’m going to make another dollar” or “I’m going to be true to my core principles”?
Mackey: I guess I’m a little bit odd in this respect, because I haven’t taken any salary from Whole Foods for almost five years now. Or bonuses. The stock options, which I would be entitled to, are given to The Whole Planet Foundation to make micro-credit loans to poor people around the world. I’m highly motivated by the purpose of Whole Foods, rather than by how much money I could potentially extract from the business in terms of compensation. I believe that I personally have more than enough wealth from the stock that I still own in the company.
Palmer: And, once again, how do you define that purpose?
Mackey: The purpose of Whole Foods is … well, if we had more time, we could talk at some length about the higher purpose of Whole Foods. I gave a talk to our Leadership Group about two weeks ago. What I can say in about a minute is that our company is organized around seven core values. Our first core value is to satisfy and delight our customers. Our second core value is team member happiness and excellence. (This is all on our website, by the way, so we make it quite public.) Our third core value is creating wealth through profits and growth. The fourth core value is being good citizens in the communities where we do business. The fifth core value is to try to do our business with environmental integrity. The sixth core value is that we view our suppliers as partners and we try to engage in win-win relationships with them. And seventh we wish to educate all of our stakeholders about healthy lifestyle and healthy eating. So our higher purposes are a direct extension of those core values. Some of these include: trying to heal America; our nation’s fat and sick and we eat terrible diets and we die of heart disease and cancer and diabetes, and those are lifestyle diseases — those are largely avoidable or reversible diseases, so that’s one of our higher purposes. We have a higher purpose about our agricultural system, to try to make it a more sustainable agricultural system that also has a high degree of productivity. The third higher purpose is connected to our Whole Planet Foundation, working with Grameen Trust and other micro-credit organizations [Editor’s Note: Grameen Bank and Grameen Trust promote microfinance in poor countries, especially for women, as a path to development] to try to help end poverty across the planet. We’re now in 39 countries — it will be 56 in two years — and that’s having a positive impact on hundreds of thousands of people already. Our fourth higher purpose is the spread of conscious capitalism.
Palmer: You’ve talked about the purposes of a business, so … why have profits? Isn’t a business a profit-maximizing enterprise? Couldn’t you do all of this without having any profits? Couldn’t you just make enough money to cover your costs?
Mackey: One answer is that you wouldn’t be very effective, because if you’re only making enough money to cover your costs, then your impact’s going to be very limited. Whole Foods has a much greater impact today than we had thirty, or twenty, or fifteen, or ten years ago. Because we’ve been highly profitable, because we’ve been able to grow and to realize our purposes more and more, we’ve been able to reach and help millions of people instead of just a few thousand people. So I think profit’s essential in order to better fulfill your purpose. Also, creating profits provides the capital that our world needs to innovate and progress — no profits, then no progress. They are completely interdependent.
Palmer: But if the profits are going into the pockets of your shareholders, then is it fulfilling the mission as much as it could?
Mackey: Of course most of our profits don’t go into the pockets of our shareholders. Only the relatively small percentage that we pay out in dividends does. Ninety plus percent of the money we have made has been reinvested in the business for growth. Strictly speaking, if we paid out one hundred percent of our profits as dividends then that would be true, but I don’t know of any business that does that other than a REIT, a Real Estate Investment Trust. Everybody else reinvests for growth. Moreover, profits for shareholders induces them to invest in the business in the first place, without which you’d have no capital at all to realize your higher purposes. The ability to increase the capital value of a firm means you’re able to create value, and a good measure of that is your share price. That’s what I meant when I said that we had created over $10 billion dollars worth of value over the past thirty plus years.
Palmer: People sometimes say that free markets create inequality. What do you think of that claim?
Mackey: I don’t think it is true. Extreme poverty has been the normal human condition for most people throughout all of history. Human beings were all equally poor and lived fairly short lives (average lifespan was 30 or less for thousands of years until the 20th century). Two hundred years ago 85% of the people alive on the planet Earth lived on less than a dollar a day in today’s dollars. 85%! That figure’s down to only about 17% now and by the end of this century it should be virtually zero. So it’s a rising tide. The world is becoming richer. People are moving out of poverty. Humanity really is advancing. Our culture is advancing. Our intelligence is advancing. We are on an upward spiral, if we manage not to destroy ourselves, which is, of course, a risk because people can be warlike at times, too. And that, by the way, is one of the reasons we should work to promote business and enterprise and wealth creation, as a healthier outlet for energy than militarism, political conflict, and wealth destruction. But that’s another big topic. So does that increase inequality? I suppose it’s not so much that capitalism creates inequality, as it helps people to become more prosperous, and inevitably that means that not everybody is going to rise at the same rate, but almost everybody ultimately rises over time. We’ve seen that happen, particularly in the past twenty years as we’ve seen literally hundreds of millions of people lifted out of poverty in China and India as they have embraced more capitalism. The reality is that some people are simply escaping poverty and becoming prosperous sooner than other people are. Now that’s not causing poverty — it is ending poverty. It’s not causing inequality in the way most people think of the term. There’s always been inequality in any type of social organization throughout history. Even communism, which purported to produce a society of equal ownership of wealth, was highly stratified and had elites who had special privileges. So I don’t see that inequality should be blamed on capitalism. Capitalism enables people to escape from poverty and become more prosperous and wealthy and that is very good. That’s the issue that we should focus on. The big gap in the world is between those countries that have adopted free market capitalism, and became rich, and those that haven’t, and stayed poor. The problem is not that some became rich, but that others stayed poor. And that doesn’t have to be! What we need is not to redistribute wealth from the rich to the poor, but to increase economic freedom everywhere and make everyone wealthy. The chart below from the Fraser Institute makes very clear that the countries which have the highest degree of economic freedom also have the highest per capita incomes and the countries which have the least economic freedom are the poorest.
It is important to understand that the poorest people living in the most economically free countries also have substantially higher incomes than poor people living in less economically free countries as the chart below clearly shows. It is therefore far better to be poor in the United States than in Chad:
Today, of Americans officially designated as ‘poor’, 99% have electricity, running water, flush toilets, and a refrigerator; 95% have a television, 88% a telephone, 71% a car and 70% air conditioning. Cornelius Vanderbilt (who was the richest man in the world during his lifetime) had none of these. Even in 1970 only 36% of all Americans had air conditioning: in 2005 79% of poor households did. —The Rational Optimist by Matt Ridley, p. 16-17
Palmer: You’ve distinguished free market capitalism from other systems in which people also make profits and have businesses, but which are often characterized as “crony capitalism.” What’s the difference between your moral vision and what exists in a lot of countries around the world?
Mackey: You’ve got to have the rule of law. People have to have rules that apply equally to everyone, and those have to be enforced by a justice system that has that goal in the forefront of their consciousness. We need an equal application of the law to everyone as the primary goal — no special privileges to some and not to others. So what’s happening in a lot of societies and what I think is happening more and more in America is you’ve got special favors given to the people who have political connections. It’s wrong. It’s bad. To the degree that any society suffers from crony capitalism or what my friend Michael Strong calls “crapitalism” you are not in a free market society any longer and you’re not optimizing prosperity; you’re unnecessarily keeping many, many people less prosperous than they would be if you had a truly free market order with the rule of law supporting it.
Palmer: Let’s turn to the country you live in, the United States. Do you think that there’s any cronyism in the U.S.?
Mackey: Let me give my favorite current example. Well, I’ve got two. One is that we now have well over a thousand waivers that have already been granted by the Obama Administration for their rules and regulations that were passed under the Health Care Reform laws. That’s a form of crony capitalism. The rules are not being applied equally to everyone. And that means that the power to give a waiver also means the power to deny one. And you can deny it to those who aren’t making the proper donations to the political party in power or who you just, for whatever reason, you don’t favor. You have an arbitrary law that you can selectively apply to some and not to others. Second, I see crony capitalism right now in all of these federal subsidies that are going into “green technology,” for example. They’re subsidizing some businesses and, ultimately, since the government doesn’t have any money on its own, it’s taking it from taxpayers and redistributing it to people who are politically favored. I see what’s happening with General Electric now, in terms of the kind of taxes they’re (not) paying, with all the special exemptions and deductions that get written into the tax laws. And since they’re so heavily into these alternative energy technologies they’re getting to a point where they’re not having to pay taxes on most of their income, just because they’re politically connected. So it offends me. I think it’s a very bad thing.
Palmer: Would you call it immoral?
Mackey: Yes, I would. Immoral … well, I call it immoral. But then you get to the point of having to define what that means. It certainly violates my personal ethics and my own sense of right and wrong. Whether that violates other people’s ethics or not, it’s hard to say. I certainly don’t like it. I’m opposed to it. It’s not compatible with my idea of how society should be governed. That sort of thing shouldn’t happen in a society that has a strong commitment to the rule of law.
Palmer: Who do you see as the main gainers from the free-market capitalism that you embrace?
Mackey: Everyone! Everyone in society is a beneficiary. It is what has lifted much of humanity out of poverty. It’s what made our country wealthy. We were once dirt poor. America was a land of opportunity, but it was not a wealthy country when it was first created. Even though America surely hasn’t been perfect, it’s enjoyed one of the freest markets in the world for a couple of hundred years, and as a result we’ve grown from very poor to a prosperous, authentically rich country.
Palmer: In her book Bourgeois Dignity, Deirdre McCloskey argued that it was a change in the way that people thought about business and entrepreneurial innovation that made possible prosperity for the common person. Do you think that we can recapture that respect for wealth-creating businesses again?
Mackey: I think we can, because I saw what happened when Ronald Reagan got elected. America was in decline in the 1970s — there’s no doubt about it; look at where our inflation was, where interest rates were, where GDP was heading, the frequency of recessions, we were suffering from “stagflation” that revealed the deep flaws of Keynesian philosophy, and then we had a leader who came in and cut taxes and freed up a lot of industries through deregulation and America experienced a renaissance, a rebirth, and that pretty much carried us for the past 25 years or more. We had basically an upward spiral of growth and progress. Unfortunately more recently we’ve gone backwards again, at least a couple of steps backwards. First, under … well, I could blame every one of these presidents and politicians, and Reagan wasn’t perfect by any means either, but most recently Bush really accelerated that retreat and now Obama’s taking it to extraordinary lengths far beyond what any other President has ever done before. But, you know, I’m an entrepreneur, and so I’m an optimist. I do think it’s possible to reverse that trend. I don’t think we’re yet in an irreversible decline, but I do think we’re going to have to make some serious changes fairly soon. We’re going bankrupt, for one thing. Unless we’re willing to take that seriously and deal with it without raising taxes and choking off the enterprise of America — unless we’re willing to deal with that, then I see decline as inevitable. But I’m still hopeful right now!
Palmer: Do you think that capitalism creates conformity or does it create space for diversity? I’m thinking about people who like kosher food or halal food or religious or cultural or sexual minorities….
Mackey: You’ve almost answered the question just by being able to list those things. Capitalism is ultimately people cooperating together to create value for other people, as well as for themselves. That’s what capitalism is. There’s of course an element of self-interest in it, as well. The key is being able to create value through cooperation and doing so for both one’s self and for others. And that creates diversity of productive effort, because human beings are very diverse in their wants and desires. Capitalism, cooperating through the market, aims to satisfy those wants and desires. So that creates tremendous space for individuality. If you live in an authoritarian society some special interest group, whether a religious hierarchy or university intellectuals or some group of fanatics who think that they know what’s best for everyone, can force their values on everyone else. They get to dictate to others. In a capitalistic society you have far more space for individuality. There’s space for billions of flowers to grow and flourish in a capitalistic society, simply because human flourishing is ultimately the goal or end of capitalism, its greatest creation.
Palmer: What’s your vision of a just, enterprising, prosperous future?
Mackey: What I’d like to see happen is first that the defenders of capitalism start to understand that the strategy they’ve been using has really played into the hands of their opponents. They’ve conceded the moral high ground and they’ve allowed the enemies of capitalism to paint it as an exploitative, greedy, selfish system that creates inequality, exploits workers, defrauds consumers, and is wrecking the environment while eroding communities. The defenders don’t know how to respond to that because they’ve already conceded major ground to the critics of capitalism. Instead, they need to shift away from their obsession with self interest and begin to see the value that capitalism creates, not merely for investors — although, of course, it does that — but the value it creates for all of the people who trade with business. It creates value for customers; it creates value for workers; it creates value for suppliers; it creates value for the society as a whole; it creates value for governments. I mean, where would our government be without a strong business sector that creates jobs and income and wealth that they can then tax, not that I’m always thrilled with that, mind you? Capitalism is a source of value. It’s the most amazing vehicle for social cooperation that has ever existed. And that’s the story we need to tell. We need to change the narrative. From an ethical standpoint, we need to change the narrative of capitalism, to show that it’s about creating shared value, not for the few, but for everyone. If people could see that the way I see it, people would love capitalism in the way I love it.
Palmer: Thank you for your time.
Mackey: It’s my pleasure, Tom.
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About the Blog
Whole Foods Market.
An occasional blogger, John actively seeks and responds to feedback on his thoughts about creating a new business paradigm, addressing issues facing the natural and organic food industry, exploring the nature of human development and much more.