Capitalism is broken

Capitalism is broken and how we can make it better

53 heads of state, the president of the world bank and 100 billionaires have agreed shareholder capitalism needs to be replaced by stakeholder capitalism.

Increasing pollution of the air, seas and rivers, increasing inequality, the exponential extraction of the natural world and increasing mental health issues indicates that western capitalism is broken andi it's time to make it better.

What is capitalism?

One definition of capitalism is: “an economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state.”

So, the key is that it’s controlled by private individuals, as opposed to communism, often considered to be the alternative to capitalism, where everything is controlled by the state.

But even communism has morphed into ‘state-controlled capitalism’. Here, the state controls large parts of the economic system, not just private owners.

Capitalism’s great strength is its capacity to engage people in innovation and to enable new and creative ways of creating new value.

Different flavours of capitalism have spread across the world since the end of World War Two in 1945. Nearly every country now runs some form of capitalism, be that western capitalism, state-controlled capitalism, Nordic capitalism and the capitalism of Germany with varying degrees of public/private partnership and state control.

It doesn’t matter which flavour of capitalism we’re talking about, all capitalism is based on consumption; the making of products and services that create value which are then consumed and used by customers.

The issue is that the impact on the environment and people of the production of those products and service hasn’t been factored into their price and has largely been ignored by almost all businesses until now,

For nearly 250 years, since ‘father of capitalism’ Adam Smith published the Wealth of Nations, we’ve been underpaying for the goods and services we’ve been buying. We’ve been using up the resources of the planet and many people’s wellbeing for free, paying only for time and materials, not the repair, regeneration and restoration needed to make good what was there in the first place.

Markets create private goods not public goods. The market assigns a zero price to depleting natural resources. To rethink capitalism is to rethink not only the public/private partnership but also how businesses are run and the role the customer has in addressing the ills of capitalism.

This is now hurting us twice: once in that those natural resources will soon be running out and secondly through the negative impact it’s having on the planet and people by causing global warming and increasing mental health issues.

Discussions at recent global talking shops indicate that attitudes are changing, albeit at a glacial pace. Here’s what happened at COP26 and the World Economic Forum event in DAVOS:  

COP26

In November 2021, the UN Climate Change Conference (COP26) in Glasgow brought together 120 world leaders for two weeks to discuss climate change. Debates covered the science, the required solutions and the actions needed to address climate change. 

Although progress was made and actions were agreed, cuts in global greenhouse gas emissions are still far from where they need to be to preserve a livable climate. 

Net Zero is not enough. We need to be regenerative, not sustainable

Being sustainable, as defined by COP26, means not exceeding 1.5°C of climate warming above pre-industrial levels. Climate warming is already 1.1°C above pre-industrial levels and, as we know, that’s already too warm.

So, setting a goal of 1.5°C is simply too hot and too late. The only way to address this is to be regenerative.

Being regenerative means creating extra value for all stakeholders, especially the planet, and with a goal of NET10, regenerating the planet at a rate of 10X. For example, if two trees are consumed in the production of products and services, then 20 new trees must be planted.

Another reason to be regenerative is that removing two trees from the planet also removes the associated biodiversity that accompanied those trees, be that other trees, plants and flowers or insects and animals and on the soil too. So, removing two trees has a far bigger impact than just the trees themselves. Additionally, in a world with a still rapidly growing population and increasing wealth the future impact of growth will be multiplied and happen more quickly, and so the damage will be far greater to the planet than it is today, so some future capacity needs to be built back in the natural environment. 

Davos 2020

In January 2020, 3,000 delegates from more than 100 countries, 53 heads of state, the president of the world bank and 100 billionaires met as they do every year in the Swiss Alps at Davos. They agreed that, within the next 50 years, shareholder capitalism needs to have been replaced by stakeholder capitalism.

So, rather than a singular focus on profit maximisation, businesses must also consider the planet, people, staff, customers, suppliers; that’s everybody and everything affected by business, to address the key issues facing humanity and the planet this decade.

In the words of Klaus Schwab, Founder and Executive Chairman of the World Economic Forum: “They have to actively contribute to a more cohesive and sustainable world.” 

The problem with GDP as a measure of capitalism

One of the challenges in measuring the success of capitalism is how we measure it. The usual way is by looking at annual Gross Domestic Product (GDP) is the total value of all goods and services produced by a county in a year and is used to measure its economic health. It is expected that GDP increases every year, and when it doesn’t, when it goes into a sustained decline, it becomes a recession resulting in job losses and a reduction in investment in business growth. When GDP is increasing, more jobs are likely to be created and wages will rise.

GDP is used by governments to guide policymakers, define taxation, expenditure on public services and to set interest rates. Companies use it to guide investing in their businesses.

But alone it is insufficient to use as a measure of how well capitalism is performing. It doesn’t show increasing levels of inequality, nor the impact on the environment or welfare. As inequality increases, resentment increases, trust decreases and societies, on the whole, become less happy.

In our personal lives, we all understand that a focus purely on money isn’t healthy. There’s more to life than money. Some countries recognise this more than others. Some countries are starting to use the Happiness Index as an indicator of the well-being of their citizens.

Bhutan, a south-central Asian country on the eastern ridges of the Himalayas, is the only country in the world that has a ‘GNH’, or ‘Gross National Happiness’ measure. This is used to ensure that material and spiritual improvements grow together. Unsurprisingly, Bhutan has been ranked as one the happiest countries in Asia.

In 2019, New Zealand Prime Minister Jacinda Ardern adopted the Happiness Index metric, creating new budgets that focus on the prosperity of local communities and paving the way for a national wellbeing budget. The UK, too, is adopting the happiness index to measure societal and personal wellbeing

The variables used in the Global Happiness Index include:

  • GDP per capita
  • Healthy life expectancy
  • Social support
  • Freedom of choice
  • Generosity
  • Perceptions of corruption 

The benefits of capitalism

Among the main benefits of capitalism are:

New technologies and possibilities

Capitalism has enabled new technologies, ideas and concepts to flourish for the benefit of humankind, to significantly improve the well-being of billions. It has enabled us to reach the lowest parts of the world, the Mariana Trench in the Pacific Ocean, the top of the world on Mount Everest, journey to Moon and back, contemplate going to Mars (and back) and create life-saving and life-enhancing medical procedures.

Increased life expectancy

So, the benefits of capitalism far outweigh the downsides many times over. As reported in The Guardian: "Lifespans have increased with remarkable consistency since 1800," says Professor Tom Kirkwood, Director of the Institute for Ageing and Health at Newcastle University. "There was no change in longevity between Roman times and 1800. But after that, we see considerable alteration. Every century the lifespan of British people increased by 20 years. Nor is this rise an exclusively British phenomenon. It is observed in most countries today. Only those with particular health problems, like South Africa's HIV infections, have failed to see rises."

During the 1990s, 500 million people were lifted out of poverty, mostly across China, India and parts of Africa.

Reduced poverty

Since Adam Smith 250 years ago described a better way of organising the production of goods and services in what is now called capitalism, massive benefits have been realised across the world with nearly everybody taken out of poverty and the opportunity for many millions of people to lead much better lives, to achieve their dreams and significantly lift the living standards for themselves and their families.

Capitalism is broken

Today, western capitalism is only running by the rules, norms, and values we have defined for it, rules that evolve. For example, there is no more child labour, working hours are considerably shorter and safer than 100 years ago, and you can no longer be put in prison if you don’t show up to work.

Capitalism has also been adjusted over the decades by anti-capitalistic movements, such as socialism. In this respect, it has proved to be very flexible and isn’t a single idea, but an amalgamation of many ideas. For this reason, it will endure, unlike previous political and economic structures, such as the Roman, Ottoman and Greek empires, and many more.

Like the rules of a game, then, we need only decide how best to update those rules so there are more winners, fewer losers and fewer people out on the margins, both rich and poor.

Autocratic monarchies and ecclesiastical hierarchies dominated western society for hundreds of years before Smith’s Wealth of Nations. As people started to rebel against these systems, capitalism offered a way that allowed people to express themselves and have control over their own destiny, and property, and to create opportunities for themselves. Democracy went well with this as it, too, allowed for individual freedoms. People gave up being looked after by landowners, the nobility, Kings and Queens, in favour of making their own way in life. Smith saw this trend in creating The Wealth of Nations.

But economic growth since 1980, when markets were deregulated and supply-side economics took hold, hasn’t been fed into improved public infrastructure. The benefits have gone disproportionally to the private sector.

In other words, capitalism can both transform and demonise us. Karl Marx, co-author of The Communist Manifesto in 1848, said capitalism “.has greatly increased the urban population as compared with the rural, and has thus rescued a considerable part of the population from the idiocy of rural life.”. He viewed rural life as inferior to urban life. In this way, he was pro-capitalism, at least at the outset, before predicting it would destroy itself, which is the very thing we are trying to avoid now.

The issues created by the current version of western capitalism

Set against the benefits that capitalism has brought are numerous problems, including:

Poor social mobility

A lack of social mobility of the poor half of the world needs to be addressed. Being born in the wrong place at the wrong time doesn’t help your prospects. When the richest 1% make all the rules for the other 99% to follow, it doesn’t help.

Rampant inequality

Opportunity inequality is a concern. The minimum wage for a UK worker is about £13,000 per year and the average salary of the FTSE 100 company director is £5,000,000. The rising tide has lifted all boats, but now the bigger boats are sailing away leaving all the smaller boats stranded or sinking.

The world has become more polarised in recent decades. People are blaming the very system that has given them all the benefits they now enjoy.

Inequality leads it mistrust and a sense of injustice and resentment. Deaths from suicide, drug overdose and alcoholism have increased significantly, claiming 100,000 lives every year. That’s not to say these are all related to capitalism, but it’s a concerning statistic if many others are becoming better off at the same time.

The economic crash of 2008 made matters worse as it was caused by the people with the money and it was the ordinary people who played no part in the slump who paid the price with broken livelihoods and the taxes to bail out the banks who were partially responsible for the catastrophe. 

Declining prospects

It used to be the case that we could safely assume we would be better off than our parents, but that isn’t necessarily so anymore.

Pollution

Some might say that capitalism is poisoning the planet for profit.

Ten key impacts we’re having on the planet today:

1)      Pollution

2)      Soil degradation

3)      Global warming

4)      Natural resource depletion

5)      Generating unsustainable waste

6)      Deforestation

7)      Polar ice caps melting

8)      Loss of biodiversity

9)      Ocean acidification

10)   Water pollution 

Increased mental health issues

Those that are making the mega-money often work 80-100 hours per week and don’t see their families or kids without being stressed and irritable, just as though in lower incomes suffer too.

What’s happening today to fix capitalism?

Finally, if you want to find out what’s already being done to fix capitalism, here are some organisations that are changing the way we define business and economic success: 

Environmental, Social and Governance (ESG) criteria

Most of us want to do the right thing. In business, many companies are adopting ESG criteria. However, they are perhaps doing it more to comply with market trends than a genuine desire to make the world a better place.

Many leaders want to move away from the relentless pursuit of short-term profits demanded by their shareholders, but doing the ‘right thing’ is difficult. When they do act, it is to protect their businesses against bad publicity or to help save the planet?

US Business Roundtable

In August 2019, 181 chief executives of leading US companies who belong to the non-profit group US Business Roundtable redefined the purpose of a corporation to ‘promote an economy that serves all Americans’. In other words, a move away from shareholder primacy to include commitments to all stakeholders.

Council for Inclusive Capitalism

In December 2020, the Council for Inclusive Capitalism was created by the Vatican to promote a more inclusive and sustainable economy. The Council believes the strongest and most valuable businesses are those that profitably create value for all stakeholders.

Its steering committee has offices across 163 countries representing 200 million workers and $2.1 trillion in market capitalisation.

B Corporation

B Corporation provides a private certification of social and environmental performance. Companies need to pass an assessment and update their governing company documents to reflect the commitments to all stakeholders. As of March 2022, there were 4,856 certified B Corporations across 153 industries in 79 countries.

Conscious Capitalism

A movement that aims to raise the standards of business. 

Forum for the future

The non-profit organisation is “reinventing the way the world works”. It recommends the Five Capitals framework for sustainability, as described by environmentalist Jonathan Porritt, that integrates natural, human, social, manufactured and financial capital into existing models.

Private sector to the rescue

Nobel Laureate economist Milton Friedman said: “The business of business is business.” But this focus on short-term profit-making is now seen to be responsible for everything that’s wrong with capitalism – from the various financial crises we have endured to increasing inequalities and climate change.

But capitalism is constantly transforming itself and it will continue to do so. And it can do that best within a free, fair and democratic system, so people are free to innovate, take risks and receive rewards for doing so, once all stakeholders are accounted for.

Most people agree the principle of capitalism is a good one, the debate only comes down to how best to implement it. Capitalism is based on creating prosperity and freedom for everybody. Markets need to be free and fair, we need only consider how free and fair they are today

Many companies are now starting to see that their responsibilities are beyond just making a profit.

The external cost of doing business needs to be factored in, the externalities in economic-speak. For example, there are social costs to burning fossil fuels that need to be accounted for.

We just need to update the rules of the game to make capitalism better and the private sector can lead the way. After all, business can’t work underwater, with failing climate, food shortages, people moving from hotter climes to cooler ones and countries going to war over rapidly reducing habitats and infertile land.

The private sector must lead the way because governments can only do so much. They can’t innovate or create the products and services needed to make capitalism work better. Big, public-listed  companies must manage the short-term expectations of their shareholders, but private sector businesses are free of all these constraints. They are agile, quick thinking and innovative, just what is needed to show the way out of this crisis.

Companies can make millions and billions of pounds out of solving the climate challenges of our time. You only have to look at electric car manufacturer Tesla, one of the most valuable car companies in the world, so there is a business opportunity in making capitalism better.

People often think business is the problem, but it’s not. We just need to update the rules by which the game of business is played. If we don’t do that in a timely way, they’ll be no more game to play.

So, we need to transform business and our daily lives to regenerate the planet, extract the excessive amounts of carbon with a carbon management system being created from the atmosphere, create better infrastructure, reduce inequality, increase productivity, and repair and restore the planet’s biodiversity.

A Gallup poll found people today associate socialism with equality, not state control, and ownership of the means of production. So, discussions around the merits of socialism need to be tempered with this mind, people are starting to forget that it is far from a utopian ideal.

Any consideration of how to fix, improve or upgrade capitalism has to start with considering human nature. McGregor defined two types of people: Theory X and Theory Y people.

Theory X people are lazy and don’t like to work; Theory Y people are self-motivated. Whichever camp you’re in, everybody needs self-esteem, self-respect and recognition for the work they have completed and the contributions made.

In improving capitalism, it is necessary to include the moral, ethical and spiritual considerations of people as part of business philosophy, especially among the leaders of business, the 1% who control the other 99%. This can be achieved by agreeing a set of values that everybody can sign-up to.

Capitalism managed with morals, vision and ethics would be the correction we need.

So far, we have seen the debate as two sided. We have free enterprise (capitalism) where people and markets are left to their own devices and on the other side state-controlled socialism, where the state is responsible for everybody and everything.

Neither extreme is a good idea. A third route is required. We need a mixed economy that contains the freedom of western capitalism that allows for innovation and risk-taking and the rewards that come with that along with the controls of state regulation. This ensures the game is played fairly and equitably, with the spoils spread in a fair way.

But perhaps the answer today isn’t capitalism, state control or a mixed economy. Rather, it is in providing consumers with more transparency of the costs and impact of producing the things they are buying. They can then choose to buy from companies not just because of their products and services, but because of the regenerative good they do for the planet and all stakeholders.

13 steps to improve capitalism

It falls to small businesses, the private sector, to fix our problem with capitalism. The only way to address that is to ensure the consumer can see the impact they are having with the purchases they make.

How do we organise economic and social life in a way that regenerates for all stakeholders?

Society reflects business. Stressed workers go home to stressed families, and stressed kids, creating stressed communities. People who are stressed make poor decisions and are less motivated.

13 steps business leaders can take to make capitalism work better from within their own businesses:

1)      Workers share more of the company’s success

2)      Address inequality within the business by raising the wages at the bottom end and lowing the top

3)      Provide professional development, education, training, and health care within the business

4)      Provide more autonomy for staff within their roles

5)      Break down the divisions between leaders, managers, directors and staff

6)      Increase the transparency of important information

7)      Be more inclusive in decision making so people feel valued

8)      Go for long term growth, not short-term profits

9)      Increase diversity, more diverse companies make better decisions and are more profitable

10)   Ensure women are in senior roles. Companies with women in the Executive outperform those without. Men tend to want to win now, women tend to want to build long-term partnerships (there’s a reason Angela Merkel was called ‘Auntie’)

11)   Make sure there is a collective shared vision that’s focused on the common good of all stakeholders

12)   Increase trust with open, honest, timely and candid dialogue

13)   Lead with awareness, alignment and values. Consider all decisions in the light of shared values and a common vision across all stakeholders.

One thing many people experienced during the Covid-19 lockdown was that it slowed everybody and everything down. For a short period (not so short for some), the rat race was on hold. Everybody was equalised, everybody had to stay at home, go to the park for exercise and queue up for things. It didn’t matter where you came from, how much you earned or where you worked, everybody became equal during this period.

For many of us, this was a great thing. We became more relaxed, more conversational with people we didn’t know or perhaps ordinarily would never talk to.

This evidence shows how inequality and constant rush increase stress levels.

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