Like any other economic and political system, capitalism is frequently the subject of debate and criticism. Strong proponents of capitalism typically point out that it’s been far more successful in producing prosperity and well-being than any other system we’ve had on offer. However, even the biggest fans of capitalism tend to agree that capitalism has come off its rails and corrective action is needed in order to get it back on track.
This was the topic in the latest episode of the Exponential View Podcast, where host Azeem Azhar and Harvard Business School professor Rebecca Henderson discuss capitalism. Interestingly, it turns out that more of half of the world’s population believe capitalism is doing more harm than good. Even in the Mecca of capitalism, Harvard Business School, 50% of the first-year students think so, according to a recent poll.
Several interesting questions are discussed in the podcast, and I highly recommend listening to it, but the key questions are the following. First, what exactly went wrong with capitalism and how did that happen? And second, is capitalism beyond repair or can it still be fixed from within?
Henderson mentions three main reasons why she thinks capitalism is broken, these also being the main reasons for her writing her new book Reimagining Capitalism in a World on Fire.
The environment is at risk and climate change continues to be a clear and present danger.
We’re not sharing enough the fruits of the prosperity we’ve been generating and wealth is rushing to the top.
The institutions that have historically held the market in balance (such as families, local communities, and government) are crumbling or even vilified.
It’s hard to say how or when things went wrong, but according to Henderson, we essentially forgot that capitalism is not just about free markets. It needs other balancing forces as well so that the returns don’t just go to capital alone, but also to labour.
In addition to a free market and all the good that can come out from it, we also need a strong democratically accountable government and a strong civil society. Regarding civil society, Henderson specifically points out a voice for labour, independent judiciary, and a free media. All these fundamental forces must be in proper tension with each other in order to ensure that capitalism works.
When it comes to fixes, Henderson gives us five prescriptions:
Business should start to look for opportunities to simultaneously address some of the major problems we face and make money.
We must be aware that the purpose of business is not to maximize profit, but to build a thriving, prosperous and free society. Businesses have duties to the institutions that sustain capitalism and the primary duty is to not actively run down these institutions.
Firms acting alone are insufficient to address the problems we face. Businesses should cooperate with other firms in same industries or regions to address some of these public goods problems together.
We need to get the capital markets onboard and essentially rewire finance. The financial sector has a strong interest in the stability and long-term health of the economy, which means that owners of capital need to step up and push the firms in their portfolio in that direction.
Business needs to help rebuild government. If the underlying problem is that society is out of balance, then business has an active economic interest and a moral duty, rooted in fundamental normative commitments of capitalism, to rebuild that balance.
Needless to say, there’s a lot to digest in Henderson’s fixes and each point would deserve a separate blog post. I might actually do that once I’ve listened to her book and absorbed more details and nuance.
At a first glance, it’s easy to agree with most of Henderson’s recommendations, although you could say, especially regarding fix number one, that it’s easier said than done. I’m also having some troubles understanding fix number five, specifically the part about business having a “moral duty”, but perhaps that clears up when reading the book.
All in all, a super important topic and something we should talk about much more in societies all over the world. I agree that we’ve benefited a lot from capitalism, but like all systems, it needs to evolve to meet the demands of the 21st century. It’s rare that things get fixed by themselves and therefore it’s up to us – the participants in the system – to make the necessary changes.