Old Wine in New Bottles: Post-Pandemic Lessons for Entrepreneurs from Adam Smith
Treating employees well has always been essential to a flourishing capitalist system.
In the ongoing wake of the Covid-19 pandemic, businesses of all kinds have seen a dizzying number of employees walk out the door, never to return. In what has become known as the Great Resignation or the Big Quit, U.S. employers have seen roughly four million people voluntarily leave their jobs each month since early 2021, a trend that shows no signs of abating any time soon. And, this disruption to the labor market is not specific to the U.S. as countries across Western Europe and Asia are experiencing similar workplace attrition. While the mass resignations we are seeing today are affecting businesses of all sizes, they have hit new and small businesses particularly hard for at least two reasons. First, because they have so few employees to begin with, the departure of a key employee or two will, by definition, have a disproportionate effect on the business’ ability to function. Second, because new and small firms tend to lack the financial resources of their larger, more established counterparts, they are less able to compete in an increasingly competitive labor market.
Some pundits and experts have argued that these resignations are a function of simple economics: the money received from government assistance programs (i.e., CARES Act, extended unemployment benefits, etc.) and/or saved by the reduction in work-related expenses (i.e., commuting, work attire, childcare, etc.) offsets the money that would be earned from a paycheck, making it financially lucrative to quit. While this opportunity cost argument has merit, it ignores the larger issue at play. In fact, most agree that the main driver of resignations over the past year is due to workers reappraising the value they place on their time and well-being.
In response to this latter explanation, businesses have begun to realize the importance of taking care of their employees, not just by the size of their paychecks, but more importantly by the way in which they support the social and emotional needs of the entire person. Thus, in a post-Covid-19 world, the businesses that win are now believed to be those that simultaneously promote the interests of both the business and the employees on which its survival depends. While this may read as blasphemy to some, to others it will seem an epiphany. Yet, it is really just old wine in new bottles. In fact, the idea that business leaders should treat people well even while seeking to turn a profit in free and competitive markets is actually something that was advocated by Adam Smith, the father of capitalism himself, almost 250 years ago.
While most people recognize Smith’s most influential work, The Wealth of Nations (WON), in which he defended the pursuit of individual self-interest, fewer are familiar with his earlier work, The Theory of the Moral Sentiments (TMS). In TMS, Smith sought to articulate a comprehensive social system that would ensure justice and welfare for all. With these ideas as a baseline, he then wrote WON for the purpose of more fully developing his ideas around the economic man. In so doing, he consciously ignored the virtues he espoused in TMS, given his assumption that most of his contemporaries would be familiar with them given TMS’s vast popularity in his day.
The relationship between these two works is important because if, as has tended to be the case since not long after Smith’s time, business leaders look only to WON for advice on how they ought to make decisions, they might be led to believe that economic motivations should be the sole criterion given that the outcomes will, in aggregate, benefit all by the grace of the invisible hand. Yet, if business leaders were to expand their understanding of Smith’s views to include TMS, a much broader view of fairness and justice emerges. While Smith does acknowledge in TMS that self-interest is a virtuous motive for action, he at the same time cautions us to avoid letting that motive trump our benevolent tendencies toward others. Indeed, he goes so far as to say that everyone should at all times be willing to sacrifice their own self-interests should they lead to outcomes that are likely to infringe on the well-being of others.
Unfortunately, policymakers have, over time, relied on WON to build a free-market, laissez-faire system of economic organization that ignores the compassion inherent in TMS. This lack of a moral compass to guide capitalist endeavors has since been interpreted by some (if not many) business leaders as somewhat of a free pass to treat employees (like all means of production) as resources to be acquired and put into use at the lowest cost possible. This lack of humanity has permeated the workplace for the past two and a half centuries…until now.
With the Covid-19 pandemic has come a reckoning on the part of the global workforce. Being laid off, furloughed or forced to work from home has given people time to think long and hard about what they really want from their professional lives. And, for many, the size of the paycheck is secondary to spending time with family, working fewer hours, commuting less, experiencing more fulfillment on the job, etc. It wasn’t that people didn’t value these things before the pandemic, but rather that they just never really stopped to think about them until a months-long Covid-19-induced quarantine gave them time to do so.
The existential crisis the pandemic ushered in has armed workers with a new sense of what is important in their lives, and their decision to quit en masse has left many businesses scrambling. In response, and at the advice of countless experts, many business leaders have implemented new programs designed to humanize the workplace, such as by expanding childcare, allowing more flexible work hours, ramping up DEI initiatives, improving internal advancement opportunities and the like. While these are all positive developments for the workplace, it is unfortunate that it took a global pandemic to call attention to them. Nevertheless, by investing in the well-being of their employees, all at the expense of their bottom lines, businesses seem to finally be enacting the principles upon which Smith believed a flourishing capitalist system ought to be grounded in the first place.
So why does this history lesson matter? It matters because although new and small businesses have the most to lose from mass resignations, they also have the most to gain. Entrepreneurs, by definition, resist the status quo. They are not bound to the old way of doing things. Thus, entrepreneurs can use the new social contract to their advantage by incorporating the full measure of Smith’s views on capitalism into their businesses. Rather than building businesses that treat transactions with employees (or any stakeholder for that matter) as a series of zero-sum gains where one party wins at the other’s expense, they can draw inspiration from Smith to reimagine these transactions as positive-sum gains where value is created for both parties. While humanizing the workplace in the way Smith envisioned may, at one time, have placed a business at a competitive disadvantage, the post-Covid-19 trends in the labor market we are witnessing today suggests that may no longer be the case. Employees are one of the most essential resources businesses (especially new and small ones) have; thus, those that are able to strike a balance between self-interest and compassion are likely to flourish in the ways Smith imagined going forward.
Entrepreneur Leadership Network Writer