Whole Foods’ John Mackey on the Morality of Capitalism and Business

By On August 12, 2012 · 25 Comments · In Links

Reason TV has put up a short interview with Whole Foods CEO John Mackey, in which he stresses the imperative for businesses to make a moral defense of capitalism, and to embrace a purpose higher than the maximization of shareholder wealth.

“We’re trying to change [the] narrative and get people to realize the type of value that business creates. The narrative of business being fundamentally greedy and selfish and exploitive…that undermines businesses’ standing in society, and it has to be defended on an ethical basis, not just on the fact that it creates wealth.”

For those of you who teach business ethics, I’d highly recommend taking a look at this 2005 piece from Reason on “Rethinking the Social Responsibility of Business.” It’s essentially a roundtable on Milton Friedman’s (overly) famous piece which claimed that the only social responsibility of business is to increase its profits. In addition to Mackey, the roundtable features thoughts from Friedman himself, and from Cypress Semiconductor CEO and erstwhile libertarian internet sensation T.J. Rogers. The whole thing would make a great addition to a syllabus.

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  • RickDiMare

    Still waiting for the real value-adding capitalists to distinguish themselves from the predatory capitalists by forming and joining a kind of mutual fund comprised only of businesses that strictly use Treasury-Direct currencies and reject all money substitutes and central-bank-issued, privately-owned, rent-seeking currencies.

    The silence is deafening, but if anyone could lead the parade, it would probably be Mackey.

  • http://www.facebook.com/people/Kevin-Currie-Knight/100000158541035 Kevin Currie-Knight

    One of the things I object to in the way people often talk about capitalism is the idea that profit-seeking and caring about others are somehow mutually exclusive. “Profit over people,” as if profit must come at the expense of people, and caring about people comes at the expense of profit. Yes, it is true that profit seeking does not always entail caring about people, and that caring about people is a different thing than caring about profit.

    But the idea that, somehow, doing something for profit MEANS that one CANNOT be caring about those one is profiting from is ill-conceived. I may well go into business selling x both because I care that people get x AND that I want to profit from selling a good x. And I really think this does cover a majority of cases, where people don’t sell what they sell solely because they care about profit (why did they go into THAT field rather than another profit-generating field?), but because they both care about what they are selling AND think they can do well for themselves by selling that thing.

    • http://independent.academia.edu/DannyFrederick Danny Frederick

      Agreed. Making a success of a business is not divorced from moral values, from things like integrity, keeping your word, ‘customer care’ (to use the jargon), quality goods and quality service, personnel policies and practices that show respect for employees, good relationships with suppliers, and so on.

      But it also depends upon a competitive environment, which keeps people on their toes, which gives them strong incentives to live up to the standards that they espouse, and which punishes them when they get it wrong. Competition does much more to improve behaviour than does lecturing businesses about ‘social responsibility.’ Indeed, the latter is damaging because business do not, or should not, have the kind of ‘social responsibilities’ that the left wish to foist upon them.

      Largely, I am in agreement with Friedman, except that he could have placed more emphasis on the kinds of things I mentioned in my first paragraph. As you say, people go into business because they want to make a success of something; if they do succeed, the riches usually follow (unless the government snatches them away).

      • http://frankhecker.com/ Frank Hecker

        It’s unclear to me to what extent you’re agreeing with Mackey or not. On the issue of “the kind of ‘social responsibilities’ that the left wish to foist upon [businesses]“, in the interview Mackey references a business as creating value for its customers, employees, suppliers, investors and the larger communities it’s part of. He then says, “we’re challenging business to be more conscious and to take their value creation to a higher level in understanding that all of these stakeholders they’re creating value for are connected together, and so you ought to strategically organize your business in such a way that you can optimize value for all of those stakeholders.”

        Per Wikipedia, “The goal of [corporate social responsibility] is to embrace responsibility for the company’s actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, stakeholders, and all other members of the public sphere who may also be considered as stakeholders.” So assuming that Wikipedia reflects a consensus position it sounds to me as though Mackey believes in the concept of corporate social responsibility thus defined.

        • TracyW

          Can businesses optimize value for all of these stakeholders? Isn’t this the pretence of knowledge problem?

          My mother has occasionally, over the years, gotten me gifts that I don’t particularly like (and I’m sure I’ve done the same to her). This is despite us having lived for nearly 18 years (over 18 years if you count the 9 months of pregnancy) on far closer terms than any business executive lives with all of their customers, employees, suppliers, investors and larger communities. If she occasionally gets it wrong in my case, what chance does a business have of carrying out that asserted goal?

        • http://independent.academia.edu/DannyFrederick Danny Frederick

          People usually go into business to make a living by creating something that people will value and be willing to pay for. That is what I mean by ‘quality products and services,’ i.e., appropriate quality as defined by the purchasers. So long as the two aspects do not come apart (as they do with crooks), businesspeople make a living only if they please their customers, at least to the extent that they provide the customers with something that is worth more to the customers than the money the customers pay for it. I would guess that, for most businesspeople, the two aspects are equally important: they won’t stay in a line of business if it will not make them a living; and they do not want to make a living by selling goods or services that dissatisfy (even if they can, as with state-protected businesses).

          A competitive market is a powerful force for welding the two aspects together, because in a competitive market, if people do not like your stuff, they do not have to buy it. But I think it would be a mistake to think that it is only the fear of going out of business, or making a loss, that motivates businesspeople to produce quality goods and services (rather than meretricious stuff that leaves people dissatisfied). In general, I think their motivation is twofold.

          Some people may go into business ALSO to make enough money to promote charitable causes. That is fine. Similarly, it is fine if a public company gives dollops of money to charity: its shareholders get a vote and they have the power of exit. But the left want to foist this sort of thing on to business as a duty, indeed, as an enforceable duty, rather than it being a discretionary activity, so that businesses end up with a ‘responsibility’ to promote the social welfare. That I object to. There is the reason that Tracy gives: it is socialism by the back door and it fails for the same reasons that socialism fails. There is also the reason that by making charitable action compulsory, it demoralises it. There is also the reason that, in the case of public companies, the owners of the company (the shareholders) all have to subscribe to the same causes, whereas, if they were paid their full dividend, they could decide, each in his own way, how much to spend charitably and on what.

          I do not object to giving to charity in general. But I think it is best left to individuals themselves to decide what and how much they do in that regard.

          In the current climate of opinion, it is actually good business for a company to give to charity, as Mackey points out. But I would like to change the climate of opinion so that corporate giving ceases to be profitable. It would be better if businesses did not do such things, because it is wasteful and frustrating. ‘Optimising value for the wider community’ or for ‘all other members of the public sphere’ is not something business should be concerned with, because it does not work (and it probably does not even make sense).

          • Jay_Z

            I am going to treat the corporation as a person here with respect to charity.
            If Monty Burns is the oligarch in Springfield, the citizens can have charitable expectations of him and love him or hate him accordingly. But he lives in the same town and interacts with the populace.
            If Wal-Mart is the largest employer in a town, the people in the town care about Wal-Mart, not the nominal owners (Walton heirs et. al.) In reality I don’t care if Wal-Mart does charity or some Walton foundation. But if Wal-Mart uses its profits from Wal-Marts in Idaho to provide gold-plated toilets to all of the parks in Arkansas, then Idaho is not served by the charitable acts of Wal-Mart. If Wal-Mart wants to be seen as chartiable to Idaho, it needs to be charitable to Idaho, either through a large program that is put in place everywhere, or direct works.

    • http://frankhecker.com/ Frank Hecker

      First, let me say that I agree with John Mackey, you, and Danny Frederick on this point. However… I think the underlying issue here is not really that some people think that “profit-seeking and caring about others are somehow mutually exclusive”; that’s a strawman argument IMO. I think rather the issue is with the conventional business wisdom today that increasing shareholder value is the sole measure by which business executives (and, by extension, capitalist enterprises as a whole) should be judged.

      So, for example, from this perspective it’s irrelevant that Steve Jobs helped bring to market beautiful well-designed products that people love to use; all that matters is the resulting Apple share price. If Apple had achieved the same financial results producing ugly crappy hard-to-use products then from a conventional business perspective he would have been equally worthy of praise. “Caring about others”, “‘customer care’ …, quality goods and quality service, personnel policies and practices that show respect for employees, good relationships with suppliers”, are all irrelevant in this context.

      • SimpleMachine88

        ” If Apple had achieved the same financial results producing ugly crappy hard-to-use products then from a conventional business perspective he
        would have been equally worthy of praise.”

        Sure why not. If a company is making money selling poor products, then there’s a lack of competition. This is probably because the government is doing something “pro-business” like paying them other peoples tax money, or protecting them with tariffs, or granting them a monopoly. Possibly with the corp’s connivance and aid, but still, it’s government’s fault. The lesson here isn’t to harangue businessmen, but rather politicos. CSR isn’t what’s needed, an honest man in congress is.

      • TracyW

        If Apple had achieved the same financial results producing ugly crappy hard-to-use products then from a conventional business perspective he would have been equally worthy of praise

        Well, under what circumstances would Apple have achieved those financial results? Presumably, where people really benefited from using the product.
        Take the first bicycles, they were crappy (no gears, lots of maintenance), and, being bicycles they were hard-to-use (there’s a reason why cycling is a good way to build up aerobic fitness). I can’t comment on beauty. But, despite those faults, bikes really improved people’s quality of life by making transport easier, particularly before the internal combustion engine. Wouldn’t such profits be well-deserved as much as Apple’s?

        Or take an emergency generator – hard-to-use, typically not designed with looks in mind, crappy efficiency compared with a baseload generator, but if one of your family members is say, a patient at a hospital, and the grid goes down, wouldn’t you be happy that they have a back-up generator? And, if there was a choice between an ugly emergency generator and a beautiful emergency generator, would you really prefer the hospital to spend more money just to get a beautiful one?

        Now if a business is only making money from ugly, crappy, hard-to-use products becuase it’s stopped its competitors from entering the market (as SimpleMachine88 describes) that’s not worthy of praise. But it’s quite possible for a business to make people a lot better off even with ugly, crappy, hard-to-use products.

        • http://frankhecker.com/ Frank Hecker

          Good points. The counter-example I was thinking of was actually Microsoft and Bill Gates. Microsoft products are not actually bad IMO, but certainly Microsoft designed its products to meet different goals than Apple. (Microsoft’s true customers, i.e., those who actually paid real money, were to a large degree PC makers and corporate buying committees, not individual users, and neither of them put a high priority on end-user ease of use.)

          So, anyway, I agree with you, I don’t think you can always justify making better-quality products based on increasing shareholder value, or even based on satisfying customers’ needs. I was pushing back against Danny Frederick’s inclusion of quality goods and quality services as part of the set of moral values businesses should follow.

          • TracyW

            My understanding is that Microsoft early on put a lot of effort into supporting third-party programmers. That meant that a lot of people wrote code for a PC rather than for an Apple. Which meant that if you wanted to do something a bit obscure, there was more likely to be a program for it on a PC than an Apple (in 1995 I worked at a company where the IT expert in the team I was working for, was a major Apple fan, and had a PC sat next to his Apple so he could use Pspice).

            And the IBM was cheaper than Apple’s machines, and used outsourcing to build components, meaning that lots of other manufacturers could make the goods, keeping prices down. Though this result seems to have been pretty accidental, not part of IBM’s plan.

            So, like the bicycle, a cheap, crappy, ugly operating system that does the job you want – or you can afford – might well be better for a customer than a beautiful, luxurious easy-to-use product that doesn’t exist, or is so expensive that buying would mean less money to spend on beer (my father brought a PC in the 1980s for our home use, despite having an Apple at his office and complaining about PC’s quality quite a bit, I think cost was the reason).

    • ThaomasH

      The point of legislation from a non-Liberatarian point of view is to adjust incentives to eliminate the discrepancy in those markets where one exists, for example, the carbon oxidation externality.

  • Sean II

    After making fun of Ayn Rand in today’s other thread, I must now go crawling back to the protection of her skirts.

    Mackey’s idea that the free market can expect to make new friends with the help of a”socially responsible” image make-over is pretty clearly bullshit.

    When a corporation “gives back” to the community, people receive two closely related messages. The first is: “Oh, how nice! Now we have a Diego Rivera style mural here at the Peoria Center for Creative Arts. Isn’t that John Mackey just swell?” The second message is” “Obviously, Whole Foods has something to apologize for, and cannot stand on its merits, else why should they drop $40,000 to gift us this tacky fresco?”

    Neither message says anything at all about the basic concepts of the market: subjective value, mutual benefit through voluntary exchange, the price system, etc.

    What makes John Mackey different from a king or a prince, or a Department of Labor bureaucrat, or a Middle Eastern petro-tyrant, is how he makes money, not how much money he gives away. They can do that just as well as he can, and they do it for the very reason he suggests – to buy legitimacy and to quiet their critics.

    Even mob bosses used to hand out turkeys at Thanksgiving, bought with some small remainder of the vast sums they stole by extortion. But mob bosses weren’t claiming to be clever strategists in a long-term battle for libertarian ideas, were they?

    I know this sounds crazy, but the only way to defend the market is by defending the market. Not the 5% that’s given over to (probable) value destruction, but the 95% that came from people getting what they actually, demonstrably wanted.

    And if Mackey was truly serious about movement politics, he’d leave that to the pros and hand over his entire 5% to BHL. :-)

    • http://frankhecker.com/ Frank Hecker

      On the subject of “[making] new friends with the help of a ‘socially responsible’ image make-over”: I wouldn’t place too much emphasis on impromptu comments in a live interview, but I did find it amusing that Mackey mentioned the “Randian type of ethical foundation [of capitalism], that it is about self-interest and that’s great” and then immediately went on to say, “Unfortunately that hasn’t sold very well to most people.” Which I guess is in the true spirit of business: If your product isn’t finding success in the market, change it or replace it :-)

      • Sean II

        “Change it or replace it”…or rename it, or bundle it with a free toaster, etc.

        It’s incredible that a businessman at Mackey’s level wouldn’t ask himself: “What happens when people notice it’s still capitalism after all? If you’ve built your hook around something that represents 5% of your total activity, what happens when people remember that 95% is a lot more than 5%?” How simple does he think people are?

        I mean…in theory, the Catholic Church could recruit new members by sponsoring an “all-indulgences-granted” rave orgy. People would show up for that. Press coverage would be off the charts. I can picture the local archbishop saying “Sure it’s unorthodox. The point is that it works!”

        But sooner or later, everyone will figure out they got tricked into hearing a sermon the next morning. For those who responded to the enticement of an orgy, that sermon is going to taste of ashes most bitter. They’ll sit through it grudgingly, then walk out unmoved.

        The kind of people who are primarily impressed by Whole Foods’ charity and philanthropy, are likely to be the same people who distrust markets, businessmen, corporations, profit, etc. They’re not just going to forget their whole ideology because the spare change from their latest veggie samosa went to build a sewage ditch in Guatemala.

  • http://frankhecker.com/ Frank Hecker

    Prof. Zwolinski, thanks for posting this video and the link to the roundtable. My apologies for commenting so much, but as someone who works in the sales department of a for-profit business this is a subject of particular interest to me. I have to say after reading the roundtable and watching the interview it’s still a bit unclear to me exactly what John Mackey’s position is regarding the ethical aspects of capitalism.

    On the one hand Mackey refers back to Adam Smith and the need for an ethical foundation to a market-based system. On the other hand some of his comments in the interview and the roundtable seem much more about “ethics as good business”, in other words ethical behavior (beyond a certain minimum, say adherence to the non-aggression principle) is justified primarily on instrumental grounds rather than intrinsic ones.

    Mackey concludes the roundtable discussion by claiming that “the ideas I’m articulating result in a more robust business model than the profit-maximization model” and “will triumph over time … by winning the competitive test of the marketplace.” But isn’t this irrelevant? Isn’t the primary point of ethical behavior that one should engage in it independent of whether one benefits financially by it or not, or whether it meets the “competitive test of the marketplace”?

    So I’m back to the key question, at least for me: Beyond the minimum of not engaging in “force or fraud”, what fundamental reasons do we have, or should we have, for behaving ethically in the context of our actions in the market? I haven’t read anything else by her, but from her prior comments on this blog I’m guessing Deirdre McCloskey would have some interesting things to say about this. Anyone else?

  • SimpleMachine88

    Eh, I’m with W.C. Fields, “never give a sucker an even break”

  • TracyW

    The question that strikes me is, what ability does a company have at actually delivering a purpose other than the maximisation of shareholder value (taking into account all the long-term advantages on shareholder value of a reputation for honesty, good quality, etc).

    Prices in a market guide companies towards producing something that’s worth more to consumers than the sum of its inputs. The need for profits creates a positive feedback circle.
    What equivalent feedback is there for other forms of value?
    Some forms of value creation are obvious, of course, eg food for the hungry, medicine for the sick, but people are perfectly capable of donating to such charities in their own right, so a company may as well leave that to its shareholders (and I think the tax system should be neutral with regards to charitable giving by corporates rather than by individuals).
    Things a company can do, that private individuals can’t, are like locating a factory one place rather than another, or say keeping a business centre open even though it’s not the most profitable version. But that always has run-on effects, the lower profits mean less money for shareholders, and thus they spend less money on something else, and that someone else therefore gets less money. It’s like the case against government subsidies in general, in that the subsidy always costs taxpayers something. There’s no reason to think that a company can understand all the follow-on effects.

    In other discussions about this, there seems to be one plausible case – where a company has the infrastructure to deliver resources into a disaster zone quickly, the company just donating that infrastructure may well be more valuable than negotiating a contract to do so with charities.

    • Sean II

      Good point. Giving at the corporate instead of the individual level brings all the usual problems of hierarchy, inefficiency, impersonal delivery of services, capture by individuals and factions, etc.

      Just take yourself by way of imagination to a pitch meeting at the Whole Foods Foundation. Let yourself hear the buzzwords of corporate Newspeak, and taste the sickly sweetness of groupthink in action. Picture the pair of earnest hipsters begging for money with their Powerpoint. They’re not just arguing for a cause, they’re fighting to create themselves a job! And all the while, the VP Marketing is sitting in, empowered to veto anything that threatens the brand.

      It’s very easy to imagine some serious foolery coming from such a process, and hard indeed to imagine much good.

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  • ThaomasH

    Not a bad statement, though tinged with
    a hint of Manichaeism: people who want certain food regulations “want to restrict
    other people’s choices,” “they can’t be happy unless they are telling other people
    what to do.” “There is a lot of anti-corporation mentality by a lot of people in
    the country.” Now granted any pure desire
    to restrict choices or tell other people what to do or anti-corporation mentality
    is bad, but is THAT the issue? Or do
    people have different assessments of the costs to consumers and producers of
    any specific regulation?

  • http://frankhecker.com/ Frank Hecker

    A few more general comments, in lieu of trying to do individual responses to all the comments that I found interesting:

    1) I think some are over-fixating on the Whole Foods “5% of net profits to charity” pledge and the presumed absurdity thereof. I think the 5% strategy makes sense from at least two perspectives. First, that of Milton Friedman, that “[in] the present [anti-capitalistic] climate of opinion … this is one way for a corporation to
    generate goodwill as a by-product of expenditures that are entirely
    justified in its own self-interest.” Second, and related, it’s a way to make shopping at Whole Foods more attractive to the sort of people who are prospective Whole Foods shoppers: Instead of getting back part of their spending in the form of coupons or whatever (like a typical loyalty program), they’re getting it back in the form of psychic satisfaction. In either case the true effectiveness of the charitable contributions is to a large degree beside the point.

    2) On the question of enhancing shareholder value, it seems that you can justify a lot of seemingly non-self-interested corporate behavior if you adopt a suitable time horizon and/or you can find or create a suitable market or market segment. In other words, some types of behavior might enhance shareholder value only in the long-term and/or only if the company can find a new market for which that behavior is adaptivet. For example, in the Microsoft-dominated world of traditional PCs the Steve Jobs/Apple obsession with beautiful design and ease of use was arguably not justified in terms of corporate self-interest and shareholder value over the shorter term, but was so justified over the longer term as Apple was able to find new markets outside the PC space where design and ease of use could be and were key market differentiators. (An example of “pre-adaptation”, to make an evolutionary analogy.)

    3) I’m still thinking about the question of whether “ethical business behavior” really exists (or should exist) beyond what could be justified by a combination of a minimal non-aggression principle and corporate self-interest (with an expected positive payoff in shareholder value in the context of a suitable time frame or market segment).

    To continue the evolutionary analogies, in humans there’s some behavior which is clearly self-interested in the sense that it would reasonably pay off for an individual within their own lifetime. However at the same time there’s other behavior, in particular doing good or punishing the bad at high cost or risk to oneself, that seems to go beyond strict self-interest in one’s lifetime and is arguably better explained by its increasing fitness on average within the overall population and thus being selected for over the longer term. Such behavior would then be “wired” in to us such that we’d engage in it not as an act of consciously-conceived self-interest but more unconsciously for the psychic satisfaction it provides, in a “virtue is its own reward” sort of way.

    An interesting question (at least to me) is whether there are analogous behaviors in the context of businesses, i.e., behaviors that are arguably non-self-interested for a business even under a broad interpretation of self-interest in the cause of maximizing shareholder value, and are better accounted for underlying norms that are “wired into” the underlying structure of present-day businesses as a result of an analogous selection process over time. If so, I think these would better candidates for true “ethical business behaviors”.

    Anyway, enough blathering for now…

    • Sean II

      About point 1)…Mackey was very clear in NOT placing his chips solely on the argument that “social responsibility” is just smart business. He went out of his way to say that Whole Foods would do the same things, even if it irritated the investors and the firm gained no public relations value in the bargain.

      Now, I happen to think he’s lying (or kidding himself) but since he put that proposition up for debate, I think we should oblige and discuss his theories instead of his practice.

      • http://frankhecker.com/ Frank Hecker

        You’re right, I was being somewhat unfair there. I think this gets back to John Mackey’s point that “the entrepreneurs, not the current investors in a
        company’s stock, have the right and responsibility to define the purpose of the company.” So in that sense the actions of Whole Foods reflect (or at least Mackey wants them to be seen as reflecting) the ethical values of Mackey and his co-founders.

        I think this is actually a reasonable position, sort of along the lines of Emerson’s “An institution is the lengthened shadow of one man.” I can also see why it might be adaptive: Would-be employees could self-select based on the match between their values and the values of the founder(s), and the resulting congruence in values could reduce transaction costs within the firm (a la Coase). However it leaves open the question of what happens when the founders’ values meet the realities of the market (e.g., as Google has allegedly violated the “don’t be evil” dictum of Brin and Page) or the founders depart from the scene (e.g., as HP allegedly turned away from the “HP Way” of Hewlett and Packard).