The Future of Capitalism

Before the century is up, we’ll have 3 billion more people on the planet. They will all need jobs. They will all need things to eat. Capitalism is our best way of making sure that we build an economy that can sustain all the people that will be here. We also need capitalism because it’s an incredible driver of innovation and change.

And the problems we face– the environmental problems, building cities for 3 billion people– we’re going to need a lot of innovation. So that’s a reason in itself to think about the future of capitalism. I think however, there’s an additional important reason, at least one. At this time gambling industry was growing up. People always like to bet their money on some sport or play casino games. Casinoslots offers Jackpotcity review for NZ players with pros/cons and analytics.

In fact, I’m going to suggest there are three additional reasons to think about the future of what we think of as capitalism. And in my mind, they all stem from the fact that capitalism is a fabulous tool but a bad master. That markets work best when they are genuinely free and fair.

When they are embedded in institutions that make sure that externalities are properly priced. Tiny bit of academic speak. What do I mean? I mean we face three big problems that markets are really bad at solving. The first is the massive environmental degradation we’re looking at.

Most obviously, global warming. But we’re also looking at the exhaustion of many of the world’s aquifers and it running out of water within the next few years. We’re looking at topsoil degradation.

We’re looking at an ocean that is being poisoned. We’re looking at widespread deforestation. Why is environmental damage such a problem?

Well partly because if you’re a firm and nobody tells you otherwise. Why not just throw your carbon dioxide out the window? Why not just cut down all the trees? Why not just catch all the fish?

If a resource doesn’t have a price on it, you’re going to use as much of it as you can. So that’s our first problem. Our second problem is steadily increasing inequality.

Inequality is interesting. You know, if you’re a capitalist, if you run a firm, differences in outcome are a feature, not a bug. One of the reasons we celebrate capitalism is because people who are really good, they get ahead, they make a ton of money.

That’s really good. But it has a number of side effects. Side effect number one is that then they can give their kids much better education, much better life chances than someone who’s not been so fortunate in their business career. But number two, if you don’t have adequate investment in education and in health, you have children growing up who do not really have a shot at ever participating, no matter who their parents are. And we’re seeing a world in which more and more of the returns to this very successful system are going to fewer and fewer people.

Why is that a problem? I believe it’s inherently unjust. But it also leads to significant social instability. Third problem– but wait, it gets worse. And I think you’re going to make it still worse, right Michael?

Third problem– way it gets worse– is markets work great when someone is setting good rules. When firms can’t collude with each other to keep out new entrants. When firms can’t fix regulations to advantage themselves. Well, the theory of capitalism has in it, per se, no theory of who fixes the rules.

Somewhere, there’s supposed to be a wise and beneficence and a well-run government. Those are nice but they’re not everywhere. So we have a market that is still going strong, that’s generating a lot of wealth, but in the meantime strip mining the planet, causing huge amounts of inequality, and writing the rules to suit itself.

So what can be done? So my course, Reimagining Capitalism, is 28 sessions. We have nearly 300 second year MBA students in it now. Nearly a half of a second year class– people really concerned about these issues.

The course is about how the private sector– how people like you– can make a difference against these problems. As I said, it’s 28 one and a half hour sessions and I’m going to summarize it in five minutes. So this will be a tiny bit abbreviated. Are you ready? Here we go.

How does business save the world. Step one. Something called shared value. You may have run into this concept. Michael Porter gave it its name, but it’s an old idea.

The idea is you can make money while simultaneously really addressing social problems. So an obvious example would be Unilever’s team business. Unilever grows a third of the branded tea in the world. They came to be concerned that environmental damage was making tea less and less sustainable. And they were worried that the fact that their tea workers were paid almost nothing was going to lead to long term trouble. So they adopted sustainable tea.

100%– they said– 100% of our is going to be sustainable. And what did they find. They found the growing tea that way it was cheaper. That consumers were more interested in buying tea if it was grown the right way, their market share went up. We are seeing hundreds and thousands of firms discover things like this.

Walmart has doubled the efficiency of its transportation fleet in just 10 years, saving a billion a year as they did it. We are seeing firms invest in local training, in raising wages, in discovering that working with people who are properly paid and properly trained is better for the firm and better for their employees. So that’s step one. Shared values.

Very exciting. Lots of it going on. Clearly not enough to solve the big problems we face. But maybe, just maybe, catalytic.

Because you know what happens when you work on shared value? You discover that, whoa, there’s a bunch of problems I can’t solve as a firm on my own. I can say I’m going to lower my carbon emissions and use renewables but that raises my price. And if all my competitors are going right ahead and burning fossil fuels, it puts me at a disadvantage. Nike discovered that when they committed to driving child labor out of their supply chain because they were afraid of brand damage, they thought they could do it alone.

But they couldn’t. Supply chains for textiles are far too complicated to have any one firm turn it around. So firms are increasingly turning to industry consortia.

To cooperation within the industry, within the region so that everyone says, tell you what, let’s not use child labor. Let’s not use fossil fuels. Let’s not dump our waste in the river. That way, it’s not to anyone’s disadvantage to behave well and we can compete on what we really care about. That will preserve our brands give us long term traction with consumers.

Make sure that we’re not subject to long term degradation of the resources on which we all rely. So that step two. Industry cooperation.

Bad news about industry cooperation is it’s tricky to maintain. Get a bunch of CEOs in a room and tell them, well, OK, next year, nobody pays any bribes, OK? We’re going to solve corruption. Nobody pays any bribes.

Nice idea, nice agreement. Everybody leaves the room, who knows what’s going to happen. So of course, you invest in auditing and metrics and tracking.

But it’s tricky. So after a while, you discover that it would be nice to engage with competent local authorities. With well written regulation. With government that knows what it’s doing. That can create the playing field that enables you to do what you want to do, which is build a great and thriving business.

You want a local government that has a strong educational system. So perhaps you do what they did in Minnesota. All the big CEOs in Minnesota got together and said, we have a problem with early childhood learning.

Far too big a problem for just the CEOs to fix. But they spent the money to do some of the early studies to say how it could be done. They ran the early experiments about how the whole system could be improved. And they improved the whole system.

This can sound a little wild and crazy, a little pie in the sky– business can change the world. But it’s happened before. We have seen at times of major crisis, a significant fraction of the business elite say, you know, this isn’t working, we need to do it differently. We need a world in which business and government are in partnership in service of the greater good and yes, the free market. The really free and fair market, which can only exist when you have strong institutions.

We saw that happen in– can anyone tell I’m British– England in the 17th century and the Glorious Revolution, when a very important part of the ruling class said, you know, this old way– keep the peasants on the land with the turnips and the King has all the power– that’s not working for us. Let’s change it. We saw it in France. We saw it in Chile. We’re even seeing it happen in parts of Brazil.

This is when business gets together. And in the US– for those of you in the US– it happened here. It happened right after World War II.

After World War II, business was afraid that would be a massive depression so they worked closely with the administration on jobs training, on programs, on the core infrastructure that we take for granted as a root source of prosperity in this country today. Business can save the world. I’ve run out of time so I’m going to say one more thing and then I’m going to hand over to you Michael. And this is where I’m going right on to Michael’s territory, so watch my body language like, get a little bit nervous here. For 20 years, I was the Eastman Kodak Professor of Management at MIT. So I know how hard change is.

That’s what I did– I studied firms like Kodak. This program I’ve just laid out to you– firms do it alone, then they cooperate, then they work on building great government– sounds great, right? Any of you going to do it on Monday morning? It’s going to be tricky.

It’s going to involve hard work. It’s going to involve a lot of innovation. It’s going to involve a lot of risk taking.

I think there’s no way it will happen unless an important group of business leaders decides to act from purpose. Decides to build great firms that not only make a lot of money but are also trying to make a difference in the world. I think those firms can be the tip of the spear. Can be the leaders that show us that these new business models and new ways of working can make a difference.

We have a lot of evidence now that such firms can make money. That they are often more productive and more creative than their conventional rivals. So I think we need to rediscover as businesspeople, a sense of great mission. Not permission to not think about strategy.

Not permission not to think about the business model. I teach 28 sessions, every session I say, where’s the money, where’s the money. What you can do well and be focused on the really important questions. And in doing that, you can begin to shift the world.

Great. Well done. My first response to Rebecca is really in the form of a question. How can I sign up for your online course?

I very much like Rebecca’s emphasis on mission or purpose driven business. And so we may find ourselves– this is the risk– with not quite enough to disagree about. Oh, I have some ideas, don’t worry.

However, it seems to me that the mission driven, purpose driven kind of business that Rebecca eloquently calls for– and rightly– faces a number of obstacles that are powerful obstacles and that need a broad social and political project to address before even the most enlightened and conscientious business executives can come together to pursue the noble vision of business that Rebecca puts before us. One of the greatest obstacles has to do, I think, with the change in the character of capitalism over the last 30 or 40 years. And that has to do with the financialization of capitalism. There’s a growing divide between business and investment in productive capacity on the one hand. And what finance does– the purpose of finance is very simple– it’s direct capital to socially useful activities. Investing in factories, plants, technology, research development, homes, education, hospitals, roads.

But in recent decades, capitalism has changed its character in a way that increasingly separates financial activity from these underlying social purposes to do with the real economy. As recently as 1980, financial activity accounted for about 10% of corporate profits. By 2005, it accounted for about 30%. Now that wouldn’t be a troubling thing if all that financial activity were fueling investment– socially productive activities. Helping business do the kinds of things that Rebecca has highlighted.

But only a tiny portion of finance is now doing that. Only about 15% of finance actually is fueling investment. And the rest of it consists mainly of casino-like speculation on existing assets like real estate and land, for example. And to some extent, on consumption.

So where the traditional Economics 101 account says that finance is the lubricant of economic activity in a business, when finance surpasses a certain role in the economy, when it explodes, as it has done in the last three to four decades, it actually becomes a drag on economic growth and on innovation and on entrepreneurship rather than fuel for it. Now this didn’t just happen. It happened as the result of deliberate policies, which goes to Rebecca’s point about the rules that govern the way capitalism works. And the dazzle and the allure of ever expanded financial activity and the speculative– the moral economy of speculation, as we might call it– has bedazzled politicians of both parties.

It’s been a bipartisan infatuation that has contributed not only to instability and the financial crisis of 2008. It’s not only been a drag on growth. But it’s also led to a kind of capture by finance of both parties and of regulatory agencies that have made it very difficult to implement the kinds of rules and regulations that Rebecca rightly emphasizes. The kinds of rules and regulations that embed capitalism in a larger social and political purpose.

Not only that, it’s fueled inequality. The growing gap between rich and poor. And even perhaps morally more corrosive– the spirit of speculation, the speculative ethic has been corrosive– in ways that we’re only beginning, I think to notice– of the dignity of ordinary work. And this, I think, has contributed to a fueling of the backlash against the kind of finance driven global capitalism that has unfolded in the last three decades. A political backlash– kind of populist backlash– that has some very ugly and dangerous features. So it seems to me that the future of capitalism depends.

It depends on us. Not only on us as people who are involved in business. Not only on business executives, enlightened, though some of them may be, especially after they’ve taken Rebecca’s online course. But it depends on us as democratic citizens to change the terms of public discourse so that we can debate these questions directly. Rebecca said something early on that I think is very important and that I want to emphasize. She described capitalism as a tool.

But what’s happened over the last four decades is that we have ceased to regard market economies as a tool. And instead, our moral and political imagination has become the captive of a certain picture of the role of money and markets in a good society. We’ve drifted, almost without realizing, from having market economies to becoming market societies. The difference is this– a market economy is, just as Rebecca said, a tool. But a market society is different.

It’s a way of life in which market values and market thinking begin to dominate almost every aspect of life. Not just the domain of material goods– cars, toasters, flat screen televisions– market society is a place where almost everything is up for sale. It’s a way of life in which market values begin to infiltrate and colonize every sphere of life from personal relations and family life to health and education and civic life and the media and law and politics. And when that happens, transactional forms of relationship begin to crowd out non-market values worth caring about.

And one of the corrosive effect– one of the non-market values crowded out has to do with the dignity of work. And by work I don’t mean the work that hedge fund managers engage in, for which they are remunerated at such rates that they are attracting increasing numbers of our graduates and of MBAs. It’s the kind of work whose dignity is eroded by a speculative way of thinking about the economy. It’s the kind of work that ordinary men and women do and in which they were taught– we were taught– to take pride.

And what happens I think– this is the most deeply morally corrosive aspect that the shift to a market society and to a naturalized version of capitalism has wrought– there’s something deeply demoralizing for ordinary citizens when the work they do and the effort they expand is almost mocked by the system of reward that we now have. Well, back some years ago, there was a British sociologist named Michael Young who wrote a book called The Rise of the Meritocracy. This is in 1958 in Britain. Now meritocracy– we think of that as a good thing.

As an ideal. As something to aspire to. A meritocracy where people are rewarded according to their contribution, according to their hard work, their talents, their effort.

But Michael Young, who coined the term, actually was writing a dystopian account of what a meritocratic future might hold. And what he glimpsed– that was at the time– Rebecca will know this– Britain was moving from a class based aristocratic society to one open to talents. And that was a good thing. But what Michael Young pointed out was there is something dangerous and even oppressive if we ever imbibed too deeply the full meritocratic idea, which is where you land depends on your merit, your virtue, how hard you work. In the old aristocratic system, if I landed at the bottom, at least I had the compensation of knowing it wasn’t my fault.

It wasn’t I doing. I just had the bad judgment to be born to poor parents. And if I landed at the top on my glory and my good fortune, but I wouldn’t inhale too deeply knowing that it was in large part due to the accident of birth. But how does that play out when people come to believe and are taught to believe that where they land depends on their virtue, their merit, their hard work.

There will still be those at the top and those at the bottom in a perfect meritocracy. But there will be a tendency, he said, for those at the top to say, I am hereby dint of my own effort and merit and virtue and I deserve it. And therefore, I look down at those below and say, they deserve their fate. He said that would be the temptation.

And equally insidious for those at the bottom to look up and to look at themselves and to say, maybe, I deserve to have landed here. Maybe I’m just not as smart or as hard working as Bill Gates. Now he predicted– Michael Young did– that in the year 2033, there would be a populist revolt against this arrangement. And it came 16 years before he predicted.

The populist revolt, the backlash against the version of global capitalism that’s been unfolding for the last three or four decades– we saw it with Brexit. We saw it with the election of Trump. We see it in the rise of populist parties in Europe. That is in large part fueled not just by job losses due to globalization and technology or stalled wages. It’s also, I think, a loss of self-esteem that ordinary working people feel and middle class people feel.

And so the future of capitalism, it seems to me, beyond trying to enlighten business executives, beyond even trying to change the rules give such advantage to unproductive forms of finance requires that we have a public debate, a revitalized public discourse about inequality, about mobility, and above all, about the way we should regard success and disadvantage and the mutual responsibility that those who landed on top should consider themselves to have for those less fortunate than themselves. What do you think, Rebecca? I thought that was fabulous, Michael. Let’s clap him too. Michael, you raised so many profound and important points. I could imagine we could spend the next little while talking about diagnosis, like what exactly has gone wrong.

We could spend our time talking about where it is we want to get to. I think you and I share a vision of a much more discussion driven, socially embedded economy. One where– a kind of old fashioned kind of capitalism. But I would like to spend a little time at the third place, which is how we get from here to there.

Because that feels to me almost the hardest thing. Because if you look at our current political situation, we have an enormous polarization not only in this country, but in many other parts of the world– if you think about what’s going to happen in France tomorrow. We see a world in which I’d rather have my son marry someone of a very different ethnic background than have him marry someone from a different political party than mine– statistically. You know, we’ve really sort of gone into our corners and started yelling at each other.

We’re a long way from the debate you were talking about. So I have this crazy idea, which might be crazy, which is that rather surprisingly, business is one of the best places to begin having that conversation. So let me try and give you just like a couple of reasons that might be the case. And I’d be very curious what you think.

So one reason it might be a good place to begin. It’s one of the places where everybody has to be polite. Where people are brought together from very different backgrounds in service of a common goal. The kinds of firms I’m thinking of– and I take your point about financialization– they’re firms that give people rides and run hospitals and build widgets and employ tens of thousands of people.

So they can see the importance of having an economy that works. And managers in those kinds of firms– not all of them– but many are very much in touch with what you describe, which is the dignity of ordinary work. For me, one of the characteristics of a purpose driven firm is you treat everyone with respect.

And you understand that everything is a part of the whole. So in my dreams, business begins that conversation, just an enlightened fraction. But you know, 1,000 CEOs control 73% of OECD GDP. I mean, business is incredibly concentrated power. If we could imagine just 100, 150, 200 of those very large firms thinking I’m managing in a different kind of way– not that it would fix things on its own, I’m not that naive– but could it help support exactly the kind of dialogue and politics and social movement that you’re thinking about? It can be an important start.

I wouldn’t want to restrict it and I suspect you wouldn’t either to businesses. I think civil society as a whole has to be a source of a rejuvenated kind of public discourse oriented to the common good. And business is an enormously important part of civil society. So are social movements.

So are congregations. So are unions. So are schools and universities. So are the media. It would be wonderful if some group of business CEOs could initiate this sort of discussion. But it would be important– and I think I understand you to be suggesting this– that their are conversations not only be about how to run their firms responsibly and how to expand their vision of the purpose of the corporation to include not only shareholder value, but also the well-being of suppliers, consumers, employees, and others whose contributions are other constituencies of the corporation.

All of that’s important. But I also think that any such movement would also have to have a political voice. Now maybe corporate leaders might shrink from that. What do you think about that?

So it’s a great question. I think, certainly historically, there have been places and times when business has been overtly political. Sometimes in a bad way, sometimes in a good way.

I think we’re beginning to see something stirring now. I’m sure you’re familiar with the business leaders who signed a letter to President Trump saying it was very important to stay in the Paris accords. This is a major international agreement with respect to global warming. I’m sure you saw the business leaders stepping up and saying, no, the way we’re approaching immigration is something I’m very uncomfortable with.

I know at the local and city levels, many business leaders are stepping up and saying, no, this destruction of our educational system, of writing off people as disposable is not OK. We want to revitalize our local neighborhoods and really work city by city. So I think you’re certainly seeing that. You remind me of something I think is almost as important as the financialization. And that’s the idea that the only moral duty of the firm is to maximize shareholder value.

I’ve met some business leaders and business people who think, well, that’s all I have to do– maximize shareholder value. But what that means is if I see something that if I do it will actively harm the society around me, why, I should go ahead and do it because it maximizes my profits. You know, if selling guns to the children in the Congo is legal, I’m there. I’m selling guns to children in the Congo. I think this is such a destructive way of thinking.

I think it does two things. One, it says the only duty is to look down into the firm. And I’m with you– I think not just CEOs, but everyone in business should be looking out to the society in which they’re embedded and saying, how do we fit with the rest. But it’s not a legal duty to maximize shareholder value in the short term. It’s not at all clear it’s the best way to maximize returns on capital.

It’s a lousy way to run a business if taken too far. And most importantly, it excuses a huge fraction of society from engaging in the debate you want them to engage in. And I’m with you. I think business should be full of people saying, I’m part of something much greater. My firm is helping to strengthen this whole system.

I like that very much and I wonder if I could complicate your task with the business leaders by adding a couple more items to the agenda. You mentioned climate change and education and policy toward immigrants and even toward guns. I wonder if I could add possibly more– I don’t know– contentious items to that agenda for the socially enlightened business community that you will help nurture. What about– and this does go to the pressures that impel companies to behave the way they do, including short-termism, including, for example, plowing most profits now into such things as buying back stocks, boosting the share price, which has an effect on the way the CEOs are remunerated. They’re pressed to do that, they would have to be almost too altruistic not to do that, given the frank policy framework, for example.

So could we add to the list, Rebecca, that they would press to change the tax code that allows corporate debt to be tax deductible but not investment in the same way. To put those two on a par. Because that’s part of what forces these companies– what fuels the financialization in part are these rules.

Or here’s another one– and it goes to the dignity of work. Social security in the United States, the primary retirement system going all the way back to FDR in 1935, is financed by a payroll tax, which is a regressive tax paid by workers and by companies. But it’s a tax on labor. Now what about the idea of proposing to getting rid of the payroll tax, regressive as it is, and swapping it out for a financial transactions tax, which at a tiny fraction of a percent even, could generate enough revenue to replace the payroll tax.

This would have an impact on several of the demoralizing tendencies that we’ve been discussing. It would be a recognition that financial transactions in this economy, especially high speed financial transactions, have little, if anything, to do with contributing to the public good. It would slightly slow that down. It would symbolically express a sense that this activity is not really helping business or the Main Street economy. And it would be a signal that we’re going to respect work by getting rid of the payroll tax and we’re going to derive those taxes from financial transactions. What do you think those corporate executives would say about that?

Now for some of them, actually, this would help them. I’m reluctant to speak for all corporate executives. I will say that I’m completely with you in wanting to remove the favorable tax treatment on debt. And I would love to get rid of the payroll tax. You and I would have a lively conversation about whether it should be replaced by a carbon tax.

Well, I would add to the list of carbon tax and a financial transactions tax because between the two, we can get rid of the payroll tax and fund infrastructure and education. And solve global warming. Yes. Let’s do that. In general, a financial transactions tax and a carbon tax to bear the burden, get rid of the payroll tax, reduce the income tax– Now we’re going too detailed. Tax carbon.

Tax consumption. Tax carbon. Tax financial transactions.

Build the infrastructure. Deal with global warming. And honor work.

What about that, Rebecca? I’m there. So we solved all the problems of the world, Bharat.

Let’s go to Q&A. So the even hashtag is [INAUDIBLE] 226. [INAUDIBLE] So you’re welcome to start asking questions [INAUDIBLE] here. Is it inevitable that capitalism must [INAUDIBLE] prices in order for businesses to lead and act? And if so, are we there yet? I think we have a major crisis.

I’ve been deeply involved in global warming for the last 12 years. And when I used to meet with other people who were also concerned about the issue, we used to say, what we really need is for a big storm to hit New York City and really cause some difficulty and damage. What we really need is for major crop failure to cause civil war in a couple of countries. We’re seeing that. The environmental crisis is with us. It’s a slow motion crisis.

And we have a major political crisis on our hands. I think whatever your own political views, the breakdown in the political conversation is a very, very serious problem. But I think what the questioner is asking is, do we need something even more visible to have business lead. I think not.

I think business is starting to lead. I literally know hundreds of businesses that are starting to move in this direction. They can see the writing on the wall.

They can see it’s not in their long term interest to consider business as usual. They’re finding ways in the short term, within the very tight constraints to make a difference. So I don’t think it’s necessary. I think alas, we may get it anyway. What is an alternative to capitalism and why would that system work better?

I think you should take this question, Michael. I’m like, a dyed in the wool capitalist here. I think that what we’ve been discussing, at least implicitly, is not capitalism for or against, but varieties of capitalism. I think we’ve been discussing various ways of embedding market economies in a framework of political rules and also that civic values and ideals that require capitalism and market economies to function in a way that contributes to the common good. Now there are some who say there is only one kind of capitalism. And that’s an unfettered, free market capitalism without regulation.

And neither of us is defending that. But I think the alternatives that we are kind of finding our way to and trying to work out and articulate are really ways of reconceiving, reimagining capitalism so that it does what unfettered free markets cannot do, which is approximate the public good. I think sometimes people look at our current situation and feel that it’s so extreme that the only way out is to reject capitalism altogether. I myself– that makes me feel very nervous because the track record of societies that rejected capitalism completely is terrible. If you don’t have the market allocating resources, then I get to do it or Michael gets to do it. And then we allocate all the economic power and with it, the political power.

And if you have a really strong democracy that can constrain Michael and I, who are allocating all the resources, then the really strong democracy can constrain the market. So you see before you two people who are very committed to the kind of mixed model where capitalism is balanced by a strong democracy and strong controls. And if I could just add, lest there be any misunderstanding, the kind of mixed regimes that we’re discussing, it seemed to me at least to be entirely compatible with most versions of social democracy. Now some people say that social democracy or democratic socialism is an alternative to capitalism. But I think there is a spectrum of ways of making use of market mechanisms as tools without allowing them to define the public good or to define social justice.

I think that the emphasis and that’s the insight of social democratic or democratic socialist traditions, which do not require getting rid of market mechanisms but do require keeping markets in their place. I guess that’s the slogan that I would use to describe the kind of position that I’m suggesting. Michael, do you know that great phrase, the American dream is alive and well and living in Denmark? You know, that social mobility is higher in Denmark.

I’m not saying Denmark is the solution. Denmark is small and culturally homogeneous in ways that make it much easier to have these conversations. But I think we need to fight our way to something like the very best of what we’ve seen here in the States. Historically, there have been moments here in the US.

But also, we’ve seen in other countries, including Japan and Germany and Scandinavia, where I think a lot of the Latin American countries are trying to find their way too. I don’t know if your answers were in response to the following question but sort of preempted it. Are you suggesting a convergence of capitalism, socialism. So let me actually take the next one. As professors at Harvard Business School, how can you influence business students who are potential future business leaders to use business for social and environmental good? Right.

Well actually, I’m a visitor at Harvard Business School. So I should defer to Rebecca on that. What do you think?

Maybe you can give us some tips, Michael. I’ll tell you how I try and do it. And you should know, I’m not the only faculty member at the business school who is deeply concerned about these issues. There are many of us who want to keep the heart of the capitalist system– all its innovation and its potential to create great prosperity. But make sure it doesn’t destroy the system in which it’s embedded. So how do how do we go about doing that.

Our number one sort of direction is to point out you don’t need to give up on running a profitable business. I think often, people think it’s either/or. That I have to be a ruthless red blooded capitalist or I can care about the world. And I think that’s sloppy thinking. There are lots of opportunities to do both.

And as I tried to suggest, when you start to work in partnership, that set of opportunities gets even bigger. So what we try and do is concretely give people case after case of firms who are doing this in real time. So for example, we teach them about the Roundtable for Sustainable Palm Oil, which was founded by Unilever. Unilever could see what was happening. The worldwide demand for palm oil was leading to enormous deforestation, which was destroying our lands in Indonesia and Malaysia, leading to global warming, and also causing widespread species and environmental destruction.

And they said, well, we can’t solve this on our own. But if we all agree to buy sustainable palm oil, we can really turn this around. And now 60% of global palm oil is sustainably committed.

It’s not perfect. There are all kinds of issues and difficulties. But people are working them. And you have business working with the civil society, with the government to try and make sure that the economies in Indonesia and Malaysia, where most palm oil is grown, a thriving economies for the people on the ground and for the children of those people. It’s very exciting. It’s very possible.

So that’s my personal route– is shows that it’s possible. Let me just pick up on a couple of questions that seem to be related. One, what are the triggers and the policy changes that gave rise to the financialization of the economy, so to speak?

And related to that, looking forward, how do you see the future of the finance industry, in particular, based on this compensation, hedge funds, based on what you discussed about the future of capitalism? Well I think some of the policy changes came in in under bipartisan auspices. In fact, many of the changes came in the 1990s during the Clinton administration as a bipartisan effort to deregulate the financial industry. In the 1990s. And this, I think, contributed to what was already beginning to be the financialization of the economy.

It goes back to the late 1970s though, when finance was seen to be a way that politicians beset with demands for public investment of various kinds. It was a way, so to speak, about sourcing the decision making on how to deal with conflicting claims. Should the government finance housing, infrastructure, education, health, opportunities for consumption. In a way, loosening and deregulating finance, unleashing finance, became an alternative to public investment in those things. So that began in the 1970s and ’80s. Then came the deregulation of the Reagan years.

Then the 1990s and the Clinton administration getting rid of Glass-Steagall. The decision by the Clinton administration not to regulate derivatives. So these were the policy choices, along with one that we’ve discussed, which is the favorable tax treatment of debt. And that’s distorted. It’s distorted the decisions that companies make about using equity versus using debt for investment.

So I think this combination of factors contributed to the financialization of the economy. We’ve discussed some possible policy responses. Taxing debt on a par with the taxation on equity. Not giving the tax break. Financial transaction tax. Others would be restoring the distinction between commercial and investment.

Banking increasing capital requirements. I would add to that banning naked credit default swaps, which are essentially casino-like speculations that have nothing directly to do with financing businesses or research and development for new companies. And then a third would be breaking up the big banks, which is discussed widely in politics today. So those six or seven measures would be, I think, a place to start.

But the more important thing is to have a public debate. I don’t know if that’s the right list exactly. But those are the ones that seem plausible. But a more direct and open public debate about this question than we’ve had in recent years. Here’s another one, just to make the link between finance and technology, given some of the students today discussed cases like Apple. Is the seeming overvaluations of tech companies, many of which produce few tangible goods, good or bad for capitalism?

A little bit of silence. Yeah, the tech companies– many of them– do produce tangible goods, so I’m not sure I fully understand the question. But the overvaluation of some of these companies goes back to the issues of financial speculation that we’ve been discussing. It leads to inflated equity prices that gives rise to the bursting of bubbles, as we’ve seen most recently with the housing crash. And we saw prior to that the tech bubble bursting. But that’s part of the dynamic that an unconstrained financialization of business contributes to, which is this cycle of overvaluation and bust.

But I would not say that tech companies don’t produce tangible goods. They do. Just for fun, let me disagree. Yeah. Which is we don’t know they’re overvalued. That’s one of the strengths of markets.

You could equally say, well, it’s pulled a lot of energy and excitement into a sector, which may create products and services that we will use. No, it could be. I don’t know that they’re overvalued. I’m speaking systemically, there is a tendency for bubbles to be created by this kind of financial activity. I’m with you on the financialization and the danger I mean, 2008, right?

We’re still trying to recover from 2008. But to have individual firms overvalued every so often– not such a big deal. There’s 15 more questions. So we’re not going to get through all of them.

Let me just make the decision to take a couple more. And before that, let me actually insert one of my own, which is, concretely in terms of changing public discourse, what is the role of the media? Well currently, the role of the media is pernicious on the whole. And it’s hard to imagine revitalizing public discourse in a way that enables it and us, as democratic citizens, to debate big questions, including questions of value, with the current media structure that we have. And that has partly to do with the ratings driven, sensation driven kind of coverage of which cable television news and talk radio are the most vivid example. Social media would also fall into this category.

So I think any attempt to revitalize public discourse to address larger questions would require rethinking the way the media is organized and funded. There will always be tabloids and their cable television equivalents, but they needn’t have the kind of dominant role in the media that they have today. And I think we have to experiment with new ways of funding media companies, whether through nonprofit mechanisms, foundation based mechanisms, or maybe socially responsible purpose driven business undertakings. Because the media that we have today is very good if what we want for public discourse are shouting matches and ideological food fights in very short 10 second soundbites. But if we want something better than that, the media has to take a different form and also be, I think, funded differently.

So I completely agree. Let me stress as part of working on this course, I’ve been reading everything I can about how societies got out of really bad situations historically. How they built more just and more inclusive societies. And the free media, a media that is really telling it like it is and where people are talking intensely about the issues, is correlated with every transition I can find. So I think it might be the most important.

But I understand there’s a professor at HBS who studies this pretty intensively. Maybe we should ask him. Next question. Wait.

If you’re not going to answer. Could I just add one thing to this? Here’s an example from the past of a purpose driven company related to the media.

I don’t know if those of you here who are old enough to remember Walter Cronkite, who used to be the anchor of the CBS Evening News. Polls showed that he was the most trusted person in America. And back in that day– now CBS News was a company– CBS was a company. There was a news division and an entertainment division.

Now it wasn’t owned by a megacorporate parent, as they all are today. No, the Washington Post and the New York Times have very different ownership structures. Yes. But the television networks back then– CBS.

The television networks are all– Now, CBS was a corporation. It was a profit driven corporation. But they regarded the news division as a public service. A public service. Not subject to the profit or ratings requirements.

Walter Cronkite saw once a year how his ratings compared to those of NBC and ABC. Now that the television news media are almost all owned by a corporate parent, they are the directors and producers and the anchors of those news programs. See, not once a year, not once a month, not once a day, but on a minute by minute basis how their ratings are comparing to those of their rivals. So maybe we need to have purpose driven businesses in the media too.

And maybe this idea that we run the corporation for many reasons, only one of which to make money, is central to solving this problem as well. Let me close by actually giving you a choice about which question to answer. One is very close to home and one is very far away.

The one close to home. So here is the question– how do HBS admissions play into the meritocracy argument. Does it contribute to the dystopias situation and what is the solution? The one further away– is capitalism the correct model for third world countries, where the economy is often controlled by a few and vast socioeconomic gaps exist between the rich and the poor? Very quickly on HBS.

HBS admissions is aggressively meritocratic and open to people from many, many different backgrounds. I believe it’s over 60% of students help get tuition support. So certainly, the school is very much aware of its role in trying to make opportunity available to everyone. On the question about the developing world, my own belief is that capitalism rightly understood– that is, properly controlled without crony capitalism, without the concentration of wealth and power– is one of the most powerful ways for developing nations to move forward.

If capital really is available to everyone– real capital that funds, real businesses– if everyone can build a business, if everyone can participate, that’s one way of breaking open the concentration of wealth and power that plagues so many countries. So to my mind, real capitalism, free and fair capitalism is a very plausible solution to what is happening in too many countries. Just to take up the question. Now I know more about Harvard College admission than I do about HBS admissions. And it illustrates the defects of meritocracy as we traditionally conceive it. Because what goes into the kind of merit that admissions officers evaluate includes all sorts of factors that are not the doing of those who are admitted.

If you look at the Ivy League and the most selective competitive colleges and universities in the US today, what percentage of the students who attend those places would you guess come from the bottom 20% of the income scale. Just shout out a number. What would you guess. What?

5%. Any others? 40%? From the bottom 20%. It’s 3%. At Harvard College, it’s 4%.

Slightly better. At Yale, it’s 2%. What percentage do you think come from the top 20%?

Not the super rich, but the top 20%? It’s around 70% at these places. And here’s one other striking fact. That the percent of the students at the top dozen most competitive places who come from the top 1% is greater than the percentage of students at these places who come from the bottom half put together of the income scale.

Which means if you are walking in the Harvard Yard, bump into someone at random, there’s a greater chance that person will come from the top 1% then from anywhere in the bottom half of the American population. Now, you could say that’s a meritocratic admissions system if it faithfully reflects who has the best grades and test scores and letters of recommendation and extracurricular activities and internships. You could say it’s a meritocratic system, but it’s a far cry from one that offers genuinely equal opportunity. And what is reflected in the admissions to top colleges and universities is a reflection, I think, of the way meritocracy such as it, works in other aspects.

Oh, but now I want to get into a fight, just so we have to finish, right? Go ahead. With 30 seconds to go. The statistics you cite is horrifying. But to me, what I hear is not the Ivy League should rethink their admissions policy, although possibly they should. What I hear is a massive failure in education and social support and wage distribution for the bottom half of the population, which is a national disgrace.

And we must address. Well, we don’t disagree about that. Though I also think it’s true that the admissions policy policies themselves could benefit from affirmative action for poor kids. And the studies that we have show that poor kids who go to top colleges and universities do every bit as well as affluent kids. And so I think there’s a lot of room there. So my first husband was born on the wrong side of the tracks in New Jersey to immigrant parents.


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