Re-imagining Capitalism for the 21st Century
Chris Pinney
Introduction
Few would disagree that capitalism is the most powerful economic system humanity has developed. Capitalist societies have experienced unprecedented economic and social progress, creating the highest standard of living the world has ever seen. It is the principles behind capitalism, such as individual rights, private property and free markets that generated the entrepreneurship, technological innovation and wealth that gave rise to the middle class in the seventeenth century. This in turn drove the political movements that overthrew monarchies and autocrats, leading to the development of the modern democratic state and the many freedoms its citizens now enjoy.
At the same time, it was the rise of nineteenth-century industrial capitalism and the impact on workers and income inequality that created a populist backlash against capitalism in the early twentieth century, giving rise to socialist movements and communism. As we enter the twenty-first century, it is a global capitalist economy that is once again seen as driving income inequality and disenfranchising workers in developed economies while exploiting those in emerging markets. As at the turn of the last century, we once again see a strong populist backlash against global capitalism and a growing political turmoil and uncertainty. In How Will Capitalism End? the economist Wolfgang Streeck notes that capitalism for the foreseeable future will hang in limbo, dead or about to die from an overdose of itself. Streeck envisages a ‘society devoid of reasonably coherent and minimally stable institutions and a period of uncertainty and insecurity’.[1]
Despite these sorts of gloomy predictions, there is good reason to believe that capitalism can be re-imagined to avoid a rerun of the early twentieth century. To do so will require a fundamental rethink of the failing social contract that successfully balanced the interests of markets with the broader interests of society for the last 60 years. We now need to re-examine the responsibilities of the private, public and civil society sectors in managing a global capitalist system. We should question what each must now do to ensure capitalism continues to play its vital role as an engine for economic and social progress. Finally, we must also examine the values and principles required to ensure that markets work effectively and fairly.
This chapter offers some thoughts on these themes from three perspectives. The first considers how the technological innovations driven by capitalism reshape society and its political and social institutions. The second considers the values, principles and assumptions that gave rise to capitalism and how they can inform the future. The third explores the unravelling social contract that has governed capitalism for the last 60 years and how it can be restructured to support twenty-first-century capitalism.
The Impact of Capitalism on Society
Over the last 500 years, capitalists in search of new ways to produce products more efficiently and profitably have been the driving force behind successive waves of technological innovations that transformed the economy from an agricultural to a mercantile one, from an industrial to a now globally integrated ‘post-industrial’ society. Each wave of innovation has dramatically lifted productivity, driving economic growth and increasing the returns to capital and to labour. While each advance has destroyed jobs in the previous economy, they have at the same time generated new jobs and income for workers as capitalists and their companies created new categories of products and services that raised the standard of living for all. For example, real per capita GDP in the USA grew nearly sevenfold during the twentieth century, and despite fluctuating levels of income inequality, standards of living improved for all economic groups, including the bottom 20 per cent of income earners. In 1900, fewer than one in five homes in the USA had running water, flush toilets, a vacuum cleaner or gas or electric heat. In 1950, fewer than 20 per cent of homes had air conditioning, a dishwasher or a microwave oven. Today, 80–100 per cent of American homes have these modern conveniences. As for standards of health:
Average life expectancy in the U.S. has grown by more than 50 per cent since 1900. Infant mortality declined from 1 in 10 back then to 1 in 150 today. Children under 15 are at least 10 times less likely to die, as one in four did during the 19th century, with their death rate reduced by 95 per cent.[2]
As we enter the twenty-first century, capitalism is driving the next wave of technological innovation, namely machine intelligence. This new wave of technology, coupled with the impact of the globalisation of the world economy, has profound implications for our economic model and society. On the one hand, this innovation has the potential to continue to improve quality of life and dramatically reduce the need for human labour in dangerous industrial jobs or boring and repetitive tasks in service industries. On the other hand, it raises fundamental questions about the future of work and the way income is distributed in society. This leads to far-reaching implications for our economic model and the political and social institutions that govern capitalism.
According to David Autor, an MIT economist who has studied the loss of middle-class jobs to technology, ‘it will be harder and harder to find things that people have a comparative advantage in versus machines’, a point reinforced in a blog called Welcome, Robot Overlords: Please Don’t Fire Us?[3] Indeed, half of the 7.5 million jobs lost during the ‘Great Recession’ were in industries that pay middle-class wages, which are defined as ranging from $38,000 to $68,000. Since the official end of the recession in June 2009, only about 70,000 – or 2 per cent – of the 3.5 million jobs gained have been in such mid-paying industries. At the same time, nearly 70 per cent of the restored jobs have been in low-paying industries. In the 17 European countries that use the euro as their currency, the numbers are even worse. Almost 4.3 million low-paying jobs have been gained since mid-2009, but the loss of mid-paying jobs has never stopped. Indeed, a total of 7.6 million such jobs are said to have disappeared between January 2008 and June 2013.
As more of the wealth generated by globalisation and machine intelligence goes to capital and large firms, so their influence on political systems increases. As the MIT economist Daron Acemoglu and James Robinson, a Harvard political scientist point out, although free markets tend to create widespread prosperity, they also have the potential to create concentrations of wealth and political power that are often used to suppress competition and entrench rent-seeking elites. This in turn further slows economic growth and income to labour. This skewed distribution of wealth has contributed to rising inequality, the decline of the middle class and the growth of a working poor ‘underclass’ whose inadequate education and low skills leave them with poor prospects for full participation in the economy as wage earners or consumers.
Some economists, including Thomas Piketty in his bestselling book Capital in the Twenty-First Century,[4] have argued that the period of high economic growth and moderate levels of income inequality in the developed economies during the last century are in fact an anomaly compared to historical norms. Piketty attributes the low levels of income inequality during this period to social upheavals, economic depressions and wars that shook up the social order, destroyed wealth and returns to capital and gave rise to pressures for higher taxation on both high-income earners and inherited wealth. But Piketty suggests that during the last 50 years, a period of relative stability and rising incomes in the developed economies, these pressures have moderated, contributing to a steady decline in tax rates on the wealthy. Therefore he postulates that we may now be returning to a norm in which the private return to capital exceeds the rate of national income and output. This condition, in the absence of high levels of taxation, is expected to accelerate the flow of income to those with capital and away from labour, leading to ever greater inequality and potential political unrest.
Piketty’s analysis is clearly reinforced by recent data. Until a decade ago, the share of total US national income going to workers was relatively stable at around 70 per cent. The share going to capital – mainly corporate profits and returns on financial investments – made up the other 30 per cent. Slowly but steadily, however, labour’s share of total national income in the USA and other OECD countries has been falling, while the share going to capital owners has gone up. During the period 2010–12, the top 1 per cent are said to have received 95 per cent of the growth in income and, according to a 2013 Credit Suisse report, now own 41 per cent of all global assets.
It is not surprising given these trends that capitalism finds itself in crisis. Once again, those who feel behind or maltreated by global capitalism are rallying behind populist and socialist movements seeking to challenge rising inequality and the power of capital over the economy and society. As in previous transitions, there is a heated debate about the values, principles and assumptions that underlie capitalism and the social contract that supports it.
What Values and Principles Will Be Needed for Capitalism Moving Forward?
Central to capitalism’s future success will be the need for a set of principles that can balance the self-interest of market participants with the broader interests of society. As we consider the road ahead, it will be useful to reflect on the values that have driven capitalism’s success in the past and how they can be drawn on to shape the path forward.
The foundations of capitalism were laid at a time when Catholicism still predominated and daily work itself was considered profane and mundane. It was the early Protestants Martin Luther (1483–1546) and John Calvin (1509–64) whose writings first established the perspective that daily work and self-improvement was a legitimate way to be in service of God’s will and therefore encouraged. It was Calvin’s writings around asceticism – frugality, rational planning and delayed gratification in service of God – that formed the backbone for the Protestant work ethic that in turn provided a strong underpinning for an emerging capitalist society.
Building from this foundation on the value of work, John Locke (1632–1704) championed free will and the right of individuals to own property, two principles that remain cornerstones of capitalist society today. His philosophy was founded on a belief in property rights, which are earned through work and can be transferred to other people only at the will of the owner. He believed that shareholders should receive profits because they have risked their property. Therefore it is the responsibility of the company’s workers to help the enterprise generate profits. Locke’s work on property rights and free enterprise is often seen as setting the groundwork and legal basis for the modern corporation.
Adam Smith (1723–90), following on Locke, was the champion of two additional principles that are still core to capitalism today. These are the principles that the best economic system for society is one that recognises individual self-interest, and that the means of production are best in private hands rather than the state’s. In his renowned Inquiry into the Nature and Causes of the Wealth of Nations (1776), Smith stated that society is best served when each person is allowed to pursue his own best interests and that the ‘invisible hand’, or the competition between individuals in the marketplace, would ensure benefit to all. Importantly, however, Smith viewed this competition played out within the confines of government regulation. He reasoned this would ensure that the self-interested behaviour of the individual would serve the common social good.
Also critical to both Locke and Smith’s reasoning was the assumption that the participants in the market were themselves moral beings who, acting in the spirit of the Protestant work ethic, adhered to the golden rule (see Tim Weinhold’s chapter below) and acted in the interests of themselves and their fellow man. This was further elaborated by Immanuel Kant (1724–1804). Under his ‘categorical imperative’, he held that people should act according to the maxims they would be willing to see become universal norms. People would adhere to the rules and keep promises, such as contracts, and follow the rules out of enlightened self-interest and therefore would never treat others simply as a means to an end.
Max Weber (1864–1920), in The Spirit of Capitalism, noted that the countries that adhered to the values espoused by Protestant theology had the highest rate of business and economic growth. Weber saw the emerging bureaucratic organisation of the industrial age with its high degree of specialisation of activities as the organisational form most capable of achieving commercial success and meeting the needs of a modern economy. He argued that this form of organisation was the most efficient and was technically superior to all other forms of administration. To him it was the most effective way of maximising efficiency and eliminating favouritism. The rise of the large, highly specialised and compartmentalised bureaucratic organisation, however, was to have a profound impact on society, and increasingly disconnected individuals from a view of work and capitalism being in the service of a higher purpose.
Weber later in his career became highly concerned about this. He noted that:
each man becomes a little cog in the machine and, aware of this, his one preoccupation is whether he can become a bigger cog. … The problem which besets us now is not how can this evolution be changed? That is impossible. The question is what will come of it.[5]
As capitalism developed in the twentieth century, Weber’s fears around the impact of the bureaucratic organisation were soon realised. While the power of large firms and the state grew in the industrial age, the influence of faith and the Protestant ethic diminished dramatically and was replaced by in an increasingly secular society focused on individualism, materialism and consumption. The values of respect for others and being of service to a higher social purpose that were an essential foundation for capitalism’s early success rapidly eroded. Business owners became narrowly focused on maximising profits in highly competitive markets. Workers became a commodity in fragmented specialised workplaces devoted to efficiency. The alienation and disregard for rights and needs of workers under this form of organisation gave rise to trade unions and in turn became the fodder for socialist movements that called for state control over the economy. This culminated in the communist revolution in Russia and the subsequent spread of communism through Eastern Europe and later China. In the Western developed capitalist economies that survived this tumultuous era, we saw the rise of the democratic welfare state with a popular mandate to ensure measures were in place to regulate the marketplace and that workers were fairly treated, including the right to form labour unions.
The rise of the social welfare state and the trade union movement brought balance back to the relationship between the interests of capital and society. It ensured that the benefits of a capitalist-driven economic growth were shared broadly with society. At the same time, this clear division of responsibility for social well-being between the public and private sectors allowed the private sector to continue focusing ever more narrowly on profits and wealth generation for their shareholders, leaving all responsibility for regulation of markets and care for society to government. This was most succinctly articulated in the late twentieth century by the economist Milton Friedman, who famously said:
there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud.[6]
We now live in a global economy in which the ability of sovereign states to set the ‘rules of the game’ and sustain the social welfare of their citizens is in rapid decline. Built for the industrial age, the large bureaucratic institutions of most governments have little capacity to keep up with the pace of change and the needs of their citizens. As governments prove increasingly unable to serve the public interest, we see public confidence in them and their leaders falling to unprecedented lows. At the same time, companies and markets have flourished. Stock market valuations continually reach new highs. Large businesses now often have unprecedented power and influence on our political system and society. Indeed, if they were compared to the size of national economies, they would account for over half of the top 150 such entities.
It is not surprising in this environment that society is now demanding that capitalists and their companies take much greater direct responsibility for their impact and role in society. This lies not only in taking more responsibility for their environmental and social impacts but also in playing an active leadership role in helping address social challenges, from global warming to world poverty. As noted by Richard Edelman, the author behind the annual Edelman Trust Barometer, heads of large global firms must now understand that they are part of global governance and must see themselves as statesmen as well as business leaders.
This is a new paradigm for companies and their leaders. Corporate leaders must now consider the role and purpose of their firms in society in ways that go well beyond the Friedman doctrine. It requires them to think holistically about all the stakeholders their firm affects and manage their relationship with them. Operating legally is now simply one component of earning the licence to operate; the rest must be earned from the stakeholders they impact, including their workforce and customers.
At a personal level, this shift requires the leaders of large firms to rethink their role as leaders not simply of businesses but of organisations with a profound impact on society. Their challenge internally is to drive and align incentive systems around a purpose-driven culture that is about more than financial performance and the next bonus cheque.
There are signs that this reflection by business leaders on capitalism’s purpose and their role as leaders is beginning to happen. In the USA there are forums such as Conscious Capitalism that focus corporate members from mid- and small-sized firms around an agenda of higher purpose, stakeholder engagement and conscious leadership and culture. Catering to a similar audience, the B Corporation movement provides a framework for certification for businesses with explicit social-purpose statements in their mission.
At the large enterprise level there are global initiatives focused on business leadership on a wide variety of systemic issues. One example is the B Team, a not-for-profit initiative formed by a global group of leaders to catalyse a better way of doing business for the well-being of people and the planet. This organisation is led by executives from Global 500 firms including Richard Branson and Paul Polman. Similarly, the World Business Council on Sustainable Development (WBCSD) is a global, CEO-led organisation of over 200 businesses and partners working to accelerate the transition to a sustainable world. This council has played a major role in mobilising business behind COP21 and other initiatives to address climate change. In 2016 the World Economic Forum, with the support of business leaders, launched the Global Commission on Business and Sustainable Development to decode the newly launched UN Sustainable Development Goals (SDGs) and show why it makes sense for business to engage in sustainable development at a far more strategic level.
Turning to finance, the Focusing Capital on the Long Term initiative led by McKinsey and major financial and corporate leaders is committed to developing practical approaches that encourage long-term behaviours in business and investment decision-making. At the national and local level, we are also seeing growing engagement by business leaders. A good example is Business in the Community, a UK charity with more than 800 corporate members and 30 years’ experience tackling a wide range of issues that are essential to creating a fairer society and a more sustainable future. These are but a few examples of business-led initiatives working to help CEOs and their companies understand their changing role in society and expand their positive impact.
Another important driver pushing CEOs and their companies to consider the broader social impact and purpose of their firms is the competition for talent and the expectation of customers. There is a growing realisation by corporate leaders that having a clear sense of social purpose is increasingly important to attract and retain motivated employees from the millennial generation. A recent Babson College study found that companies with a strong sustainability commitment see increases in employees’ productivity by as much as 13 per cent, reductions in turnover by as much as 50 per cent, and workers willing to take a pay cut of up to 5 per cent to work there.[7] The corporate purpose conversation is complemented by the spirituality and mindfulness in the workplace movements. A study by a large multinational firm in 2013 showed that employees working in environments that support their right to be open about their religious beliefs feel safer, have better working relationships with colleagues and are more likely to be engaged in their work.[8]
Turning to consumer expectations, a 2015 Nielsen study showed that 66 per cent of global respondents said they were willing to pay more for sustainable goods, up from 55 per cent in 2014 (and 50 per cent in 2013). At the same time, there is a small but rapidly growing movement by investors in putting their money behind their beliefs. According to the US SIF Foundation’s 2016 report Sustainable and Responsible Investing Trends in the United States, as of year-end 2015, more than one out of every five dollars under professional management in the USA – $8.72 trillion or more – was invested in socially responsible and sustainable investment funds.
These kinds of marketplace drivers, coupled with broader societal expectation for business leadership in society, provide a useful platform for considering how to restore the values of enlightened self-interest and reciprocity with society that are essential to restoring faith in capitalism in the twenty-first century.
What Kind of Social Contract Will Be Needed for Capitalism in the Twenty-first Century?
Central to the success of capitalism to date has been a social contract that relied on the ability of governments to ensure that the competitive and profit-driven ambitions of the marketplace played out within the confines of government regulation. This, as Adam Smith reasoned, would ensure that the self-interested behaviour of the individual would serve the common social good.
During most of the latter part of the twentieth century this arrangement worked well. Governments regulated markets, placed constraints on the movement of capital, set labour standards and the right of workers to organise unions, and imposed progressive taxation regimes to redistribute wealth. Labour unions operating within protected labour markets were in turn able to negotiate effectively for their share of income from the profits generated by capitalism. This ensured that the wealth generated by capitalism raised all boats and drove an increasingly consumer-based economy.
As we entered the twenty-first century, this social contract was fast unravelling in the developed nations due to an increasingly globally integrated economy driven by rapid advances in technology. Global economic integration began in the 1970s as new shipping and communications technologies gave the private sector unprecedented access to a global labour market and supply chain. Global labour market arbitrage enabled capital to escape the constraints of the high-cost developed-economy labour markets, reducing capital’s costs and increasing its profitability while diminishing the power of unions. For the first time in a century the developed economies saw financial gains from rising productivity no longer shared with their workforce. At the same time, the economic forces of globalisation created political pressure on governments to reduce tariffs and lower taxes on corporations and the wealthy to compete for capital investment and jobs in a global marketplace.
The net effect of globalisation and technological innovation over the last 50 years has been a dramatic change in the balance of power between capital, government and labour in favour of capital. While the power of government and labour has declined in relative terms, the power of civil society has increased dramatically. Today there are a host of activist NGOs, from Greenpeace to Human Rights Watch, that are now at the forefront of holding capitalism and the private sector accountable to the public interest. At the same time, it is organisations such as the Environmental Defense Fund and the Fair Factory Coalition that are working with companies to help them find practical ways to discharge their new responsibilities as corporate citizens.
Moving forward, we can expect a continuous decrease in the capability of governments to set viable rules for global capitalism and in providing services to citizens. Falling revenues, an ageing workforce and mounting entitlement spending will leave little room for governments to lead the innovations now needed. This will leave increasing responsibility for setting the rules to protect the public interest and for delivering public goods to the private sector and civil society. Successful twenty-first-century capitalism will require a much more collaborative and adaptive social contract where responsibility and accountability for setting the rules and ensuring provision of public goods and services are distributed across the public, private and civil society sectors. Central to this transition will be the need for governments to see their role not as the sole mandator of the ‘rules’ and primary deliverer of social services but rather as enabler and collaborator with the private and civil society sectors to ensure that rules are in place and services delivered.
The first decades of the twenty-first century have shown the beginnings of a move to this new social contract. Every major global firm is now issuing a corporate responsibility report of some kind and has dedicated staff working on corporate sustainability and social responsibility. Over the last 20 years, ‘rule setting’ for these firms has moved well beyond compliance with the law. It now includes embracing a wide variety of ‘soft law’ or voluntary codes and standards that have been actively negotiated with NGOs and other stakeholders, including governments. These range from standards on labour practices and human rights to consumer packaging to environmental practices. Governments have begun to appreciate that industry-level voluntary initiatives such as the Responsible Care programme of the American Chemistry Council, with some government oversight and monitoring, can make an important contribution to protecting the public interest. At the same time, governments are starting to understand that enabling adaptive problem-solving by the participants in a dispute can often be more effective than, or a useful supplement to, formal rules and regulations. The UN ‘Protect, Respect and Remedy’ Framework for Business and Human Rights, for example, sets out a set of principles for valuing human rights and a framework for dialogue designed to enable multisector solutions to human-rights challenges. The framework relies on voluntary corporate leadership recognising that respecting rights is not currently an obligation that international law generally imposes directly on companies. This kind of framework is a good example of adaptive problem-solving and multisector burden-sharing of the public interest that will be required as we go forward.
We will also need to see much more robust public–private partnerships to address systemic social and environmental challenges. A good example of emerging models for this can be seen in the active involvement of global firms in developing the COP21 framework to control global warming. The final COP21 agreement includes commitments from more than 5,000 companies that together represent over $38 trillion in revenue. Also in Paris, the Science Based Targets initiative announced that 114 companies – including Ikea, Coca-Cola, Walmart, Kellogg and Dell – voluntarily committed to set emissions reduction targets in line with what scientists say is necessary to keep global warming below the threshold of 2 °C.
From reducing poverty through the UN Sustainable Development Goals to improving education, there are now thousands of initiatives at the local and international levels in which business leaders are active participants trying to solve systemic social challenges with NGOs and governments. Scaling up these forms of collaborative governance and service delivery initiatives on a global scale is essential to build a twenty-first-century social contract. It is a contract in which the private sector must now take much greater direct responsibility for managing its impacts on society and partner with the public sector and government to address broader challenges. It is only through this kind of active sharing in responsibility for society by the private sector that we ensure capitalism can remain a key driver for economic and social progress.
Conclusion
The challenges facing capitalism today are many but there is good reason to believe that by drawing on the values that guided the founders of capitalism and by re-imagining the social contract, these challenges can be overcome. None of this will be easy or simple to achieve. It will require business leaders who understand that the business of business can no longer simply be maximising returns to shareholders. It will require government leaders who are willing to move beyond the twentieth-century command-and-control mindset of their industrial-age bureaucracies. It will require civil society leaders who are more than critics but are solutions-orientated.
As some of the most powerful actors in society, private-sector leadership will be particularly critical. It is also the private sector that has the most at stake in the current crisis in capitalism. It is only through their active participation and leadership that we can expect to achieve the kind of robust partnerships with government and civil society needed to address the complex challenges ahead. As we have seen, this kind of leadership is possible and the seeds of this transformation in the role of business in society are emerging. The challenge now is to make sure they develop fully into a new social contract that can ensure capitalism can continue to play its vital role in driving economic and social progress in the twenty-first century.
Notes to Chapter 2
[1] Wolfgang Streeck, How Will Capitalism End? Essays on a Failing System, London: Verso, 2016.
[2] Stephen Moore and Julian Simon, It’s Getting Better All the Time: 100 Greatest Trends of the Last 100 Years, Washington, DC: Cato Institute, 2000.
[3] K. Drum, Welcome, Robot Overlords. Please Don’t Fire Us?, Mother Jones, 2013.
[4] Thomas Piketty, Capital in the Twenty-First Century, Cambridge, MA: Belknap Press of Harvard University, 2014.
[5] ‘Max Weber on Bureaucratization in 1909’, in J. P. Mayer, Max Weber Classic Monographs, Vol. 4: Max Weber and German Politics, London: Faber & Faber, 1944; repr. Routledge, 1998, pp. 126, 127.
[6] Milton Friedman, Capitalism and Freedom, 40th Anniversary Edition, Chicago, IL: University of Chicago Press, 2002, p. 133.
[7] S. Rochlin, R. Bliss, S. Jordan and C. Y. Kiser, Project ROI: Defining the Competitive and Financial Advantages of Corporate Responsibility and Sustainability, 2015, p. 3.
[8] Sirota Survey Intelligence report presented at the Society for Industrial and Organizational Psychology’s annual conference 2013.