Foreward to Chinese edition of Putting Purpose Into Practice: the Economics of Mutuality

By Li Daokui
Dean, Institute for Chinese Economic Practice and Thinking,
Tsinghua University

The Economics of Mutuality: A new approach to achieving common prosperity

China's development has entered a new stage in the second decade of the 21st century, in which the Central Committee of the Communist Party of China has proposed that solid advances towards common prosperity are an essential requirement of socialism and an important feature of Chinese-style modernization [1]. There has been much discussion in all sectors of Chinese society about how to achieve common prosperity, and to a certain degree, there have also been many misunderstandings. Many worry about whether common prosperity means that the wealth of those who first become rich will somehow be handed over to the government which will then be distributed to those groups with a relatively low level of income or wealth and whether this will lead to the wealth of entrepreneurs not being able to inherit normally, resulting in a decline in enthusiasm among entrepreneurs and investors, a decline in the efficiency of the operation of the economy, and even poor economic performance.

Common prosperity is, in fact, a beautiful vision of human society, and how to achieve common prosperity is a major worldwide issue. Putting Purpose into Practice: the Economics of Mutuality offers a fresh perspective in answer to this question.

Let's first review the path to achieving common prosperity within societies with a traditional market economy. It is generally believed that realizing traditional common prosperity is a composite of two processes. The first is that energetic entrepreneurs and owners of essential production factors (such as land, capital, and labor) gain their own returns from participating in economic activity; the main goal of this process is the maximization of efficiency. The second is that the government or other social institutions redistribute the wealth and income of different groups either voluntarily or involuntarily; the main goal of this process is achieving social equity. Given this, a dilemma between efficiency and equity appears: if we take care of efficiency, redistribution must be reduced, often leading to the income and wealth gap between different groups in society widening. If we take care of equity, the increase in redistribution often leads to a decline in the economic returns of the owners of key production factors, their enthusiasm will be frustrated, efficiency across all of society will be lost and it may even fall into the trap of high-level welfare.

The dilemma between efficiency and equity is a fundamental contradiction in societies with a traditional market economy and is particularly evident in the United States. The US market economy model is rather efficient on the production side and we may do well to follow in the footsteps of Mark Zuckerberg in exploring this model. A well-educated, young social elite with promise, Zuckerberg attended the Phillips Exeter Academy, one of the most elite schools in the US, before entering Harvard University. He had thought about starting a business even before graduating. In less than ten years, with his highly developed business acumen and through tenacious hard work, he would quickly join the ranks of the richest people in the world. What, in the US model, will Zuckerberg do next? It is highly probable that Zuckerberg will retire completely from his company in the next few years, transfer the company to the public through the stock market, and invest the wealth he realizes in public welfare programs. This is the US model of common prosperity. The advantage of this model is that it is extremely efficient so young and promising social elites have a huge motivation to innovate and start businesses. However, there are also two significant flaws in this model. First, not everyone is at such a high level as Zuckerberg and will donate their wealth after becoming successful. Therefore, the high concentration of wealth is a problem which plagues US society, with new businesses and wealth growing particularly prominent in recent years with the acceleration of the scientific and technological revolution.

Second, within this model, a large number of young people work hard in what in Chinese has been termed the "9-9-6" pattern where input is not necessarily matched by their reward. Third, in their operations and expansion, such profit-oriented businesses often disregard the long-term interests of the public. Zuckerberg's business has, in fact, been caught up in the whirlpool of numerous social controversies.

It is at this point of the discussion that the idea of the Economics of Mutuality comes into play. What is the Economics of Mutuality? The idea of the Economics of Mutuality is to take into account the goal of common prosperity at the production state of the economy instead of first pursuing efficiency in the production process and accumulating wealth before redistributing it as in the case of Zuckerberg. The Economics of Mutuality advocates that a business is not a business entity for which the entire goal is maximization of profit, and that a business should intrinsically be a community of interests which includes the business’ investors, managers, employees, customers, and up- and down-stream suppliers, and that it should even be a community of interests for the whole of society, similar to an ecology or platform. A business should pursue the goal of maximizing the welfare of all its stakeholders.

The concept of the Economics of Mutuality sounds beautiful but are there in fact any successful cases? The first successful example of the Economics of Mutuality I encountered is a family business in the US that chiefly produces chocolate and other food products, a business called Mars. This business, which has been run by the Mars family for over one hundred years, distributes its products across the world, is highly competitive in the market, and to date has never been listed. The business has a clear stipulation that no profit earned by it is to be shared as dividends and must remain within the business for use in reproduction or carrying out other public welfare activities. Stephen Badger, one of the heads of Mars, first proposed the Economics of Mutuality in 2007 [2]. His idea was that a business cannot be investor- or manager-centered. Rather, it is a community of interests, a platform, in which the interests of all parties must be taken care of. According to the principle of the Economics of Mutuality, the welfare effect of the whole of society is considered in the production process of an economy and the principle of common prosperity has actually been implemented. If one takes coffee production businesses as an example, in the procurement process, the interest of the coffee bean growers should be taken into account, leaving them with sufficient financial returns. During the production process, the interests of employees should be taken into account, providing them with sufficient leave, benefits, and training opportunities. During the sales process, the interests of customers must be taken into account, ensuring that the product is healthy and free from harm.

It is perhaps the concept and practice of the Economics of Mutuality that has kept the Mars family united. Nobody is burdened by wealth and this large family of more than one hundred members still gathers with boundless joy each year. It truly is a legend!

My first contact with the concept of the Economics of Mutuality was when Bruno Roche, one of this book’s authors, introduced it in person. Working at Mars, he introduced me to the legendary development of Mars. I subsequently met the head of Mars at the Boao Forum for Asia and this left a deep impression on me. I also frequently cite the example of Mars in my own teaching and research.

Now, many businesses across the world have embarked on a journey of the Economics of Mutuality. Examples include Bosch and Bertelsmann in Germany and Maersk in Denmark, all of which are the most famous multinational companies in the world. Their founders and family members have withdrawn from the businesses’ operations and transferred their shares to public-interest foundations which participate in management of the businesses. Therefore, such businesses behave differently from Zuckerberg’s business in the US. They tend to be better able to take into account balanced and diversified goals such as environmental protections, employee benefits, customer interests, and long-term research and development. I myself have previously studied the German market economy model, and have written a book The Germany Market Economy Model. The German market economy model is based on the principles of the Economics of Mutuality.

Putting Purpose into Practice: the Economics of Mutuality is based on the authors' previous research but has two key innovations in comparison with their previous research. First, this book seeks to move the Economics of Mutuality from an economic concept to practical application. The authors, for example, propose to design a new balance sheet for businesses which not only takes into account traditional financial assets and liabilities but also takes into account social capital assets and liabilities. Second, this book provides a large number of real cases. In addition to the case of Mars, this book also mentions the cases of the world’s largest office carpet manufacturer Interface, and the famous British business Marks & Spencer. Through these cases, the reader is able to understand in the most direct way the concept of the Economics of Mutuality and the mode of operations of Economics of Mutuality businesses.

Is it feasible to apply the concept of the Economics of Mutuality to the Chinese economy? My point of view is that overall the concept of the Economics of Mutuality is feasible in the Chinese economy. Chinese business Huawei has, in fact, already partially put the concept of the Economics of Mutuality into practice. Huawei does not pursue the financial returns of its investors or founders but pursues the interest of society as a whole including research and development innovation, employee benefits, and up- and down-stream customers. The book also mentions the case of JD.com which demonstrates that the concept of the Economics of Mutuality is gradually being applied in China.

For the Economics of Mutuality to be truly popularized in theory and practice, I think there is need for the addition of a new dimension which may not have been emphasized enough in this book: the government is also an important component in the Economics of Mutuality. The government is an extremely important stakeholder and participant in the economic activity of any modern market economy. In general, in developed countries, approximately 40% of GDP is distributed through the government. Therefore, the interests of the government must be taken into account if the concept of the Economics of Mutuality is to be promoted further. The interests of government cannot be simply equated to maximizing social benefits which include maintaining economic growth, social stability, increasing employment, and expanding taxation. The Institute for Chinese Economic Practice and Thinking, Tsinghua University, which I head, has proposed the concept of the study of government and market economics as an important emerging field for research. To this end, international societies have been established, academic journals published and associated textbooks and graduate courses developed. Government and market economics considers the government to be an extremely important direct participant in the modern market economy, with the behavior and stimulation of the government directly affecting the performance of the market economy. Therefore, it is imperative that a mechanism be established to encourage the nurture of government and the development of supervision of the market economy so that the role of the government and the role of the market can be driven in the same direction. Consequently, further research and promotion of the Economics of Mutuality are inseparable from government and market economics.

In conclusion, the Economics of Mutuality is an extremely important concept that has undergone many useful explorations in practice putting forward a new idea for achieving common prosperity. If it can be further combined with government and market economics, the Economics of Mutuality can expect to be further promoted in more depth in both theory and practice.

[1] The original statement of the General Secretary here has been referenced: Xi Jinping: Solid advances towards common prosperity: https://baijiahao.baidu.com/s?id=1713670174990338651&wfr=spider&for=pc

[2] See the introduction on Mars' official website: https://chn.mars.com/news-and-stories/articles/%E7%8E%9B%E6%B0%8F%E5%85%AC%E5%8F%B8%E8%AE%BE%E7%AB%8B%E4%BA%92%E6%83%A0%E7%BB%8F%E6%B5%8E%E5%B9%B3%E5%8F%B0%E5%8A%A9%E6%8E%A8%E4%BC%81%E4%B8%9A%E7%A4%BE%E4%BC%9A%E8%A7%92%E8%89%B2%E5%8F%8A%E5%BD%B1%E5%93%8D%E5%8A%9B%E8%BD%AC%E5%9E%8B?language_content_entity=zh-hans