Survivors at a storm at sea. Painter unkown.
The future of capitalism is in question. What business leaders and entrepreneurs have long thought to be a stable social and economic system of capitalism, is now posing a risk for businesses. As business and policy leaders, we have to ask ourselves new questions. Why is this happening? What are the blind spots of our current system of business and finance? Are we missing important scarcities and sources of value creation right under our nose? In this essay, I take a look at the latest thinking on the future of capitalism and hopeful signs that we can navigate our way out of the current crisis.
Capitalism is in crisis. A recent poll in the United States found that 40% of Americans would prefer to live in a socialist country instead of a capitalist one. Given America has been the standard bearer for free markets, and won the Cold War against a totalitarian form of socialism, this is incredible. What we have long thought to be a stable social and economic system of capitalism, is now posing a risk for businesses. As business leaders and entrepreneurs, we have to ask ourselves new questions. Why is this happening? What are the blind spots of our current system of business and finance? Are we missing important scarcities and sources of value creation right under our nose?
Before answering these questions, we first have to decide to take the time to reflect on the idea of capitalism; this is not an obvious reflex for most of us. Asking a business leader or entrepreneur to think about capitalism is like asking a fish to think about water. We live in it and breath it everyday. We are under intense pressure to keep swimming. It is the matrix that we cannot always see yet drives us. It is the system that guides our decisions, our investments, and our risks. On a smaller scale, we see this same dynamic of ‘the fish in water’ at play in our own businesses. Everyday, we operate ‘in’ our businesses serving customers, leading teams, managing our financial performance, etc. However, every entrepreneur knows that from time to time, you have to step outside the business and work 'on’ it. You need to rethink your strategy, imagine new products, and new ways of doing business to compete in the marketplace. The same phenomenon is occurring across the entire global economy. To regain public confidence in the capitalist enterprise, we need to work “on” capitalism, not just “in” it.
The distinguished Oxford professor, Dr. Colin Mayer, the former dean of the Saïd Business School and an expert on corporate finance, recently proposed a paradigm shift in how business leaders should think about capitalism.
He articulated the old paradigm as the following:
“Capitalism is an economic system of private ownership of the means of production and the operation of these productive resources for profit. Ownership is a bundle of rights over assets conferring strong forms of authority on those that possess them. Firms in this context are nexuses of contracts and overseen by a board of directors for the benefit of their owners.”
Basically, in this paradigm, governments uphold rights, private property ownership and contracts to encourage entrepreneurs and their employees to pursue their own self-interest in creating value for customers.
The brilliance of this system, first fully described by Adam Smith before even calling it capitalism, is its ability to align the interests of the investor and the business manager to effectively and efficiently employ resources for the most productive ends. In exchange for creating value for customers, business owners are able to receive money that becomes a source of their growing wealth. When capitalism works for employees, higher productivity raises incomes and living standards, improving access to important goods like healthcare, education, and housing. Over the past centuries, various incarnations of the capitalist economic paradigm have brought millions of people out of poverty into material prosperity.
A case for change: rising scarcities of human, social, and natural capital
If capitalism works so well at improving living standards, why does the old paradigm need to change? The nature of scarcity has changed. According to Bruno Roche and Jay Jaykub, authors of Completing Capitalism, “today’s dominant economic model still focuses on creating financial capital (making money with money) at a time when financial capital is abundant.” Using monetary policies that significantly decreased the cost of lending, central banks have pumped extremely high levels of money into the financial system over the last decade. Yet our political and economic system still makes management and measurement of financial capital our primary focus as if it were the only scarce resource.
Following the ‘maximizing shareholder value’ theory of University of Chicago professor Milton Friedman, we lost our understanding of the reality that business leaders are embedded in a society, in a network of mutual relationships. Friedman taught that a CEO’s sole social responsibility was to make profits for his investors within the bounds of the law and according to ethical customs. Lost was the post-WWII consensus that businesses needed to share the benefits of their success with their employees, local communities, and others that have a ‘stake’ in the business. Since the 1970’s, Friedman’s new ideology led to a glorification of short-term profits for investors over all obligations to other ‘stakeholders.’ Finance transformed from the enabler of business to become the absolute master, unleashing the new behemoth of ‘financial capitalism.’
As a result of this new ideology, we forgot what earlier business leaders like Henry Ford knew well: customers need livelihoods to buy our products and services. Ford made sure his employees could afford the Model T. While financial capital has been rewarded generously, wages for workers have flat-lined or decreased. The costs to maintain our ‘human capital,’ (health, education, etc.) have shot up significantly. To cover the gap between incomes and costs, personal debt has skyrocketed. In developed countries like the U.S., the benefits of higher productivity (higher incomes and living standards) are no longer being shared with the middle class. For the first time in America, our life expectancy is decreasing. We allowed inequality to explode to a point that now a growing part of our society is not participating in the work world. As a result, socialism and nationalistic populism are on the rise again in areas most affected by a dying middle class. We under invested in people, the heart of our economy, and now we are reaping the consequences.
Financial capitalism, as inspired by Friedman, has no regard for our human ecology, the reality that humans and our businesses exist inside a biological environment. In Completing Capitalism, Roche and Jakub reference that scarce natural resources are being used at an alarmingly unsustainable rate. We are overshooting our global capacity to renew what they term ‘natural capital’ (freshwater, energy, topsoil, biodiversity, etc.), the resources needed to support human life and economic activity over the long-term. We are taking more from Earth than the planet can now sustainably provide.
In the realm of technology, leading companies lived by a new motto: move fast and break things. Supersized tech behemoths (Facebook, Amazon, Netflix, Google, etc.) accessed abundant financial capital to launch new products and businesses so quickly society did not even have the time to understand what kind of impact it would have on our privacy, competitive markets, and our democratic institutions. In the age of Surveillance Capitalism and Cambridge Analytica, these companies broke the very things they were reliant on for their business models. Human connection has decreased. The legitimacy of democracy to govern has dramatically dropped. Sociologists and political scientists call this a dangerous crisis of declining ‘social capital.’
These long-term disinvestments in human, social, and natural capital will lead to the destruction of the very economic system that creates wealth for entrepreneurs and brought material prosperity to millions of people. Even Standard and Poor’s Rating Agency (S&P) stated that runaway economic inequality is harming American economic growth by excluding large parts of the population from its cumulative benefits. According to their research, higher levels of economic inequality in the developed world are increasing political pressures, discouraging trade, investment, and hiring. In fragile areas of the global south, the prevalence of famines, droughts, and environmental degradation will continue to intensify battles over scarce resources like water and topsoil and force millions of people to migrate to developed countries, risking political stability in all regions.
As we likely head into a global recession, these issues will only be exacerbated. Ray Dalio, founder of Bridgewater Associates and manager of $150 billion in global investments, has predicted that high levels of inequality, unsustainable debt, and the upcoming recession will likely lead to war.
Redefining performance and success
The future of business hangs in the balance. To secure the future, entrepreneurs and business leaders need to quickly adapt to a new paradigm of success and performance. To reform our notion of capitalism, Mayer provides the following new paradigm:
“Capitalism is an economic and social system for producing profitable solutions to the problems of people and planet. Private and public owners provide these solutions and do not profit from producing problems for people and planet. Ownership is not just a bundle of [property] rights but also a set of obligations [to stakeholders] to put their purpose into practice. Firms in this context are not just nexuses of contracts but a nexus of relations of trust based on principles and values upheld by the boards, directors, and companies.”
As business leaders and entrepreneurs, we have a purpose to put into practice: solve problems for people and planet without creating more problems, build relationships of trust, and uphold our values as leaders in society.
This new vision ennobles our work as business leaders and provides a new way to think about performance, leadership, and management. Performance and success in this new paradigm is about managing scarce resources profitably for people and planet. It is inspiring because it is a realistic alternative to the failed ideologies of the past. It is built on the reality that our businesses are embedded in human societies and dependent on natural ecologies to thrive.
There have been hopeful signs. The Business Roundtable, a powerful collection of over 180 American CEOs, made a public statement this weekend ending their decades of support for Friedman’s idea that the purpose of business is to maximize shareholder value. They provided a new vision that looks at the full range of stakeholders that need to experience the benefits of growth and prosperity. This is a big shift in the right direction.
To practically implement this new paradigm as entrepreneurs, we need to be able to go beyond high profile statements to measure and manage all forms of capital (financial, human, social, natural, etc.) each according to their unique nature. Human capabilities, our social bonds and our ecologies cannot be managed like money but they can be effectively stewarded to support human flourishing. To rebuild trust in business, we need to ensure that all stakeholders of our companies get to experience the shared benefits of our success.