In the short run, there is no better business strategy than politics — in particular, using the political process to capture the rules of the game. Why subject oneself to the vagaries and uncertainties of competition if one can set up rules to keep competitors out? Every corporation, if it had its way, would like its customers, suppliers, and employees to have no alternative to itself — that is the definition of a monopolist. And there is no surer way to be a monopolist than to establish your monopoly by regulation. This is the natural instinct of business. Adam Smith wrote of this instinct in the eighteenth century, and in fact we see evidence of this behavior as far back as Ancient Mesopotamia, through Imperial Rome, and into the British Empire.
But whilst this instinct is timeless, the norms that govern the social appropriateness of corporate political engagement change over time. Fifty years ago in America, corporate engagement in politics was so frowned upon that the US Chamber of Commerce had to commission a respected jurist and future Supreme Court justice Lewis Powell to author a memorandum on how business could improve the social permissibility of this practice. “Business must learn the lesson … that political power is necessary; that such power must be assidously [sic] cultivated; and that when necessary, it must be used aggressively and with determination—without embarrassment,” Powell wrote in his somewhat infamous memo, without embarrassment.
Powell’s suggestions, authored in the early 1970s, included coopting universities and business schools, so that they could teach courses to young entrepreneurs on how to lobby the state. “The Chamber should enjoy a particular rapport with the increasingly influential graduate schools of business … Should not the Chamber also request specific courses in such schools dealing with the entire scope of the problem addressed by this memorandum? This is now essential training for the executives of the future.” He was as blatant as that.
Powell was successful wildly beyond his original intent. In the fifty years since his memorandum, corporations in America have become so embedded in setting (and capturing) state policy, and the public has become so inured and cynical to its effects, that public support for free-enterprise itself is teetering.
Much of the public outrage we see in America is borne of a sense that the economic system is rigged. The same is true in several other countries. Many people today are angry because they see corporations as having cheated on setting the rules of the game. The track record of business in politics is opportunistic self-service, on this there is considerable evidence in the academic literature. University of Chicago economics professors Raghuram Rajan and Luigi Zingales perhaps captured the nature of that evidence most succinctly in the title to their best-selling book, “Saving Capitalism from the Capitalists,” where they argued that the free market now has to be constantly saved from the instincts of its most successful entrepreneurs to subvert fair competition.
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Michael Porter is arguably the world’s most famous business guru alive today, responsible for developing what is widely recognized as the modern field of business strategy. Porter’s description of strategy, developed in the late 1970s, sometime after the Powell memorandum (but in no direct relation to it), is simple and powerful: The objective of every for-profit firm should be to become a monopolist. With this objective, the firm will be doggedly focused on economic efficiency, which is its social purpose. With all firms trying to do this, no one firm will succeed at being a monopolist for any substantively significant period of time.
Like Powell’s, Porter’s thinking was hugely influential: In 1983, Porter assumed the headship of one of the Harvard MBA program’s flagship courses: Business Policy I. This was a course that explored the role of the general manager in meeting the various responsibilities of business leadership — to customers, employees, shareholders, and society. Porter reimagined the course consistent with his own highly popular elective at the time, a course on competition and strategy. Describing his transformation of the Harvard curriculum to Fortune magazine in 1987, Porter affirmed, “I took out all the material on the general manager, and on the values of society and the manager. It became a course in strategy, not in general management.” Porter’s strategy was widely taught in business schools across the US and the world starting the 1980s. By the end of that decade, he was practically a household name.
These days, Porter is concerned with a different problem — America’s failing political system. Porter wants business to solve the gridlock in politics. Partly this is because Porter, like many angry populists (although he is hardly one), has recognized that much of the failure in America’s political system can be attributed to business interference. But it so happens that Porter’s own 1970s strategy was silent on whether it was legitimate for a business to become a monopoly by capturing the state. And many businesses have taken this silence as legitimizing their political approach to the strategic dominance of markets, à la Powell. In effect, Powell and Porter unintentionally made a deadly combination that has capsized capitalism itself.
Karthik Ramanna is professor of business and public policy at the University of Oxford’s Blavatnik School of Government. The above is an excerpt from an in-process manuscript tentatively titled “Managing in the Age of Outrage.”